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Instead of discharging into the ocean, could it be used for drinking water?

Can't do that and generate power. You'd spent all (or at least a lot) of the generated energy pumping the water where it needs to go.

That was proposed but rejected by the government.

It looks to be a fairly long ways from major cities, is that why?

That is correct. It's located in one of the most remote areas of New Zealand, and a very long way from cities with a decent population.