In March, Musk wagered that his company could get a grid-connected battery system in South Australia installed and working within 100 days to help alleviate blackouts, going back and forth on Twitter with Australian software billionaire Mike Cannon-Brookes.
If Tesla falters, Musk said it would cost the company "a very large sum of money, maybe $50 million or more".
"If South Australia's willing to take a big risk, then so are we", he said.
In September a year ago the state was plunged into a blackout after a severe storm interrupted power supply.
Jay Wilson Weatherill, the Premier of South Australia, remarked that the battery "will completely transform the way in which renewable energy is stored, and also stabilize the South Australian network as well as putting downward pressure on prices".
The battery will operate continuously to provide stability services for renewable energy generators, the state government said. "This historic agreement does more than bring a sustainable energy giant in Telsa to South Australia, it will also have some significant economic spin-offs".
Tesla confirmed it had been selected following a competitive bidding process to provide a 100MW/129MWh Powerpack system that will be paired with Neoen's Hornsdale Wind Farm near Jamestown in South Australia.
South Australia, which relies heavily on solar and wind-generated energy, has been scrambling to find a way to bolster its fragile power grid since the entire state suffered a blackout during a storm previous year.
Tesla has now been picked to develop the world's largest grid-scale battery in South Australia.
If they fail, Musk has promised that the battery will be offered for free.
Due to be up and running by December 2017, the project will see a scaled-up version of Tesla's Powerpack technology used. In January, Tesla completed number two, an 80-MW energy storage facility for Southern California Edison.