The South Australian Premier Jay Weatherill has inked another deal with Tesla founder Elon Musk for a massive new solar project.

At least 50,000 homes across the state will get a free solar and battery system installed, according to a plan announced on Sunday.

"My government has already delivered the world's biggest battery, now we will deliver the world's largest virtual power plant," Weatherill said.

"We will use people's homes as a way to generate energy for the South Australian grid, with participating households benefiting with significant savings in their energy bills."

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Energy Minister Tom Koutsantonis said the plan would lower power bills by 30 per cent for participants.

Here's how it works.

What is a virtual power plant?

Basically a "virtual power plant" is created by connecting homes with batteries (which store electricity produced by solar panels) to a central control system.

Each home will have a smart meter that can be controlled by an external operator.

Managers of the "power plant" will be able to access each home's battery systems and instruct it to release electricity on to the grid in times of need. This allows electricity to be moved to different areas or to be called upon during peak periods.

How will the SA plan work?

Public housing tenants will be the first to benefit from the plan, with 1100 Housing SA properties participating in a trial. They will have a 5kW solar panel system and 13.5kWh Tesla Powerwall 2 battery installed for free.

Later 24,000 Housing Trust properties will have the systems installed and after that up to 25,000 private homeowners will be able to sign up to the project from about July 2019.

The State Government says it will roll out at least 50,000 home solar systems, and when combined they should create a "power plant" that generates 250MW of electricity.

The Tesla Powerwall 2 battery stores electricity collected by solar panels. Photo / Supplied
The Tesla Powerwall 2 battery stores electricity collected by solar panels. Photo / Supplied

In comparison, South Australia's Playford B coal-fired power station (which was mothballed in 2012 and is currently being demolished) could generate 240MW of power. The larger Northern Power Station could generate 520MW.

Tesla said in a statement to AFP that the virtual power plant would have 250MW of solar energy and 650MW hours of battery storage.

"At key moments, the virtual power plant could provide as much capacity as a large gas turbine or coal power plant," the company added.

The government will kickstart the project through a A$2 million ($2.1m) grant and will also provide a A$30m loan to Tesla from the Renewable Technology Fund.

So who pays for it?

One of the features of the South Australia plan is that homeowners will not own the electricity produced by the solar panels installed on their roofs.

They will have to buy the electricity — although this has been estimated to cost about 27c/kWh — 30 per cent cheaper than the current average residential retail cost.