Tesla PowerPack battery storage project is on display during its unveiling in Mira Loma, California, U.S. on January 30, 2017. Picture taken on January 30, 2017. REUTERS/Nichola Groom

(Reuters) - The U.S. energy storage market fell 11 percent in the second quarter as utilities connected fewer large projects to the grid, but batteries deployed in homes and businesses hit a record thanks to state incentives in California and Hawaii and lower prices on the technology.

Overall, the U.S. deployed 38 megawatts of new energy storage during the period, down from 42.8 MW a year ago, according to a report released on Thursday by GTM Research and the Energy Storage Association. More than 40 percent of that was installed in homes and businesses, up from just 9 percent in the first quarter.

The market for energy storage is still small, but growing rapidly as the costs of battery systems have fallen 10 to 15 percent over the last year, according to GTM analyst Ravi Manghani. Batteries can help solve the intermittency of solar energy generation, but the costs are still so high they need government support to make financial sense for customers.

California, for instance, mandated that utilities procure energy storage systems to help ensure reliable electricity supply following a major natural gas leak near Los Angeles. Those systems created a surge in the utility-scale storage market at the end of 2016 and in the first quarter of 2017, so the decline in the second quarter was expected.

California was the largest market for both residential and commercial installations, with 604 kilowatts and 12,030 kilowatts, respectively, thanks to a state incentive program that can halve the cost of a battery. State regulators doubled funding for the program earlier this year.

Top battery manufacturers include Tesla Inc, LG Chem Ltd and Samsung SDI Co Ltd.

Businesses are increasingly using batteries to lower hefty utility charges that are based on their peak demand.

Home battery systems allow customers to store solar power generated during the day for use after sunset. But most homeowners who purchase batteries to pair with their solar systems want them primarily for backup power in the event of an outage, Manghani said.

Hawaii was the second-biggest residential storage market with 552 kW. Because of its very high electricity rates and lack of a net metering program, batteries are an attractive option for many homeowners in Hawaii.