In practice, electrical demand varies greatly in the course of a day. It generally maximizes during the day, and slacks off at night. Of course, there must be enough generation capacity to handle the peak loads, which means a lot of that capacity might be "idle" during slack times. By using this "off-peak" power to pump water into a reservoir in the middle of the night, the water can be released during later peak demand times to handle some of the requirements, reducing the load on the power plants.

Ideally, this "buffer" means you can get by with fewer power plants to start with, or extend the margin of the ones you have.