Abstract Water-energy nexus refers to the interdependence between water resources and energy conversion, and it encompasses the multiple phases of electric power generation and water processing and distribution. Current policies for the utilization of freshwater resources in electric power generation regulate the thermal discharges and their effect on the aquatic life. Water withdrawals and consumption polices are mainly prescribed at the regional level instead. This paper focuses on the effects of water policy constraints on electric power generation in changing climate conditions. A river basin is simulated, which hosts two hydraulically linked power generating stations, namely an upstream hydropower plant with reservoir and a downstream thermal power plant. Two alternative cooling designs are tested for the thermal power plant, i.e. once-through and wet tower cooling. Severe drought conditions leading to small river flows and high water temperatures are analyzed, and the limitations to the energy conversion at the thermal plant stemming from the water policies are quantified. The results show that some small flexibility in the water policy constraints during extreme droughts can secure a significant amount of energy to the power system, which would have been curtailed otherwise. Remarkably, the relaxation of 1.5 °C in the water policy constraints prevents the curtailment of 42% of the generation capacity of a 1000 MW e thermal plant during the analyzed 24 h drought scenario. In general, the type and the required amount of constraint relaxation depend on the environmental conditions and are to be judged case-by-case. Furthermore, the smart scheduling of water resources grants a 7% increase of the energy converted during droughts in the hydraulically linked hydro and thermal power plants. Finally, the analysis shows that once-through cooling systems are extremely sensitive to changes in water flow and temperature opening space for less sensitive technologies, i.e. wet cooling towers.