The California-based company will work in partnership with French energy utility Neoen to deliver the project to a wind farm north of South Australia’s capital Adelaide.
The move comes in a bid to help stabilise South Australia’s power grid and reduce energy prices, and will make the state a leader in renewable energy.
Musk has said that the 129MWh battery, which is paired with a wind farm, is planned to be three times as powerful as the next largest lithium ion battery.
He confirmed on Twitter that the battery would be up and running within 100 days of signing the contract or would be delivered free.
Deputy chief executive of Neoen, Romain Desrousseaux, said that at 129MWh the South Australian lithium ion battery would become the largest in the world.
Musk told reporters in Adelaide that there would be technical challenges to consider during the project, considering its planned status as the largest battery installation in the world “by a significant margin”.
“When you make something three times as big, does it still work as well? We think it will, but there is some risk in that,” he said.
“We’re confident in our techniques and the design of the system.
“You can essentially charge up the battery packs when you have excess power when the cost of production is very low … and then discharge it when the cost of power production is high, and this effectively lowers the average cost to the end customer.
“It’s a fundamental efficiency improvement for the grid.”
The battery comes as part of a $550m energy plan drawn up by the state government following a state-wide blackout in 2016.
“I’m thrilled with the selection of Neoen and Tesla, whose experience and world leadership in energy security and renewables will help South Australia take charge of its energy future,” said the state’s premier, Jay Weatherill.
“Battery storage is the future of our national energy market and the eyes of the world will be following our leadership in this space.
“This historic agreement does more than bring a sustainable energy giant in Tesla to South Australia, it will also have some significant economic spin-offs.”
The region has experienced ongoing problems with energy blackouts since September last year, leading to the federal government directing blame at the continued use of renewable technologies.