Abstract: A bi-level optimization model of distributed energy storage system is proposed to consider the system peaking demand under the aggregator model, which balances the benefits of the aggregator and the peaking operation cost of the power system. The outer model considers the arbitrage revenue, peak shaving subsidy revenue and investment cost of energy storage, which aims to maximize the aggregator’s annual revenue to improve its investment enthusiasm. The inner model is a system operation problem, considering peak shaving using energy storage auxiliary thermal power generating units, and the model aims at minimizing the total system peak shaving cost. The simulation is verified in the modified hybrid system with IEEE 30 and IEEE 33 node system. The results verify the feasibility and effectiveness of the proposed model.