It can work when the marginal cost of new capacity is high, compared to existing capacity. E.g., if the marginal cost of supporting 1 kW of new capacity may be

It can work when the marginal cost of new capacity is high, compared to existing capacity. E.g., if the marginal cost of supporting 1 kW of new capacity may be X, while the current averaged cost of 1 kW provided to existing customers may be Y, with Y < X. The customer will calculate their ROI on a battery purchase based on the cost Y of kW to them, which may be poor (4%), while on the government level of the ROI may is closer to that implied by the cost X (say 10%). However, the government cannot easily pass on the "marginal cost" to customers as there is no specific kWh which is that marginal one across all customers. In this case a subsidy directly picks out customers who can reduce their demand by buying a battery (e.g., a subsidy which raises the ROI to somewhere between 4% and 10%).