The invention provides a method and system for operating an inverter based distributed power generation source with energy storage system, as a Flexible AC Transmission System (FACTS) device—a STATCOM. The inverter based distributed power generation source can provide reactive power compensation, voltage regulation, damping enhancement, stability improvement and other benefits provided by FACTS devices. These STATCOM functions are provided when the said energy storage based distributed power generation source is doing at least one of: i) not exchanging active power with said power grid system, or ii) exchanging active power less than a maximum inverter capacity with said power grid system. The present invention thus provides a technological improvement that opens up a new set of applications and potential revenue earning opportunities for energy storage based distributed power generation sources other than simply from exchanging (injecting or absorbing) active power.