A battery, billed as one of the biggest in the world, will be the first project funded under Victoria's revived State Energy Commission but it won't be majority-government owned.
The SEC will invest $245 million into a renewable energy hub near Melton in Melbourne's outer west.
The $1 billion facility will be made up of three battery components and provide 1.6 gigawatt hours of storage once complete, enough to power 200,000 homes during peak hours.
"Which is roughly around the size of Geelong and Ballarat combined," Premier Jacinta Allan told reporters after the ceremonial turning of the first sod on Thursday.
The project is being developed in partnership with renewable energy investor Equis Australia.
Major construction was to begin on Thursday, with the hub of 444 Tesla mega packs expected to be operational by 2025.
It will be the largest system in the southern hemisphere and third largest in the world.
The Victorian government said the project will create up to 155 construction jobs and firm up energy generated by wind and solar, as the state pushes to meet its bold renewable and storage targets.
"This project here alone represents a quarter of the storage capacity that Victoria will need to have built by 2030," State Electricity Commission Minister Lily D'Ambrosio said.
Equis co-founder and managing director David Russell said it was the first time the developer had partnered with a government for a renewable energy project.
"The impact will be incredible, we connect directly into the nerve centre of the transmission system in Victoria," he said.
"It will be the fastest responding piece of infrastructure in this state."
He predicts the batteries could have a life of up to 30 or 40 years and there are plans to return them to Telsa in the United States to be recycled when no longer viable.
Before last year's Victorian state election, Labor promised to bring back the SEC if it secured a third term.
It earmarked an initial investment of $1 billion towards renewable energy projects overseen by the commission to deliver 4.5 gigawatts of power to replace the state's aging coal-fired power stations
Victoria's state-owned electricity assets were privatised in the 1990s.
Ms D'Ambrosio said the commission, which received more than 100 registrations of interest for its first investment, would own 38.5 per cent of the battery project.
"We've made a commitment that across the entire 4.5 gigawatt portfolio ... that the SEC would have majority control that is 51 per cent," she said.
"That will grow as new projects are in."
A press release from when Labor announced the return of the SEC said "the government will own a majority in each new project".
Opposition Leader John Pesutto said it amounted to a broken promise.
"This is not a government-owned project," he said.
Labor also pledged to enshrine the SEC in the state's constitution this year but the plan has stalled because of a lack of support in the upper house.
Australian Associated Press