The concept of a cloud, in general, implies that the resource in question is located at some remotely managed location. In the case of cloud energy storage, that means that said resources affect energy use and storage.
It is essential to recognize that grid operators view the reduction in energy consumption to be similar to energy generation. Meaning that if you have an energy resource(s) (refrigerators, air conditioners, appliances, factory equipment, etc.) that are consistently known to consume 100 kW, shutting down said devices (from grid operators perspective) is identical to adding 100 kW of capacity to the grid.
Let's say you have control of every AC in every residential building, in a specific area. Buildings in question are all connected to the same location sub-station. For the sake of simple math, let's say there are 50 buildings, and each building has 100 apartments. Each apartment has a single AC unit rated at 2000 W. In the middle of a hot summer, if you were to shut down all of those ACs, that would amount to 10 MW of free-floating capacity.
Although rules vary, a lot of grid operators will value a nega-watt (a negative-watt is a watt obtained via curtailment) at the same rate as a watt obtained via generation. On top of that, the grid operators will also pay a "reserved capacity," which you will get regardless of whether the grid operator chooses tap CES resources.
If we look at NYC, the average cost kW/h is $0.25, thus turning off all CES resources ( from the example above) for one hour will net you $2,500 in energy fees. On top of that, you can get around $10 per kW of reserved capacity per month. Meaning every month, you will get $100,000 from the grid operator aside from the CES resource use fee.
Challenges are social, regulatory, technical. For one, you need to have reliable, consistent, and ongoing control of your CES resources. Managing hundreds or even thousands of devices across vast distances with different owners and behaviors is challenging. Further, aggregation of these devices need to comply with rules and protocols set forth from each grid operator. If you fail to deliver on your commitment to providing capacity, you promised there are substantial penalties.
From a regulatory perspective, you have to deal with each grid operator independently. Each operator will likely have their own set of rules that you have to follow and will have their unique way of doing validation and verification. It is critical to recognize how each grid operator will judge the performance of each CES resource. Specifically, what does it mean to prevent CES resources of consuming energy it otherwise would. How do you know that that CES resources would not turn off on its own (in case of ACs)?
From the social perspective, you need to need to find a way to mitigate impact curtailment will have on CES owners or at the very least, keep them in the program. Emphasis is placed now on ensuring no or minimal inconvenience to CES owners.