Preact is utilized to achieve React-like component architecture with a smaller bundle size, which is particularly beneficial for applications like Netlify's embeddable identity-widget. To work on UI components in isolation using Storybook, which is primarily built for React, developers can employ the preact-compat library that bridges Preact with React's API. By configuring Webpack to replace React and react-dom with preact-compat, developers can set up Storybook with Preact-based projects. This involves installing necessary dependencies, setting up Storybook's configuration files, customizing Webpack to resolve React imports to preact-compat, and writing component stories. Once configured, running Storybook allows developers to view and test Preact-based UI components independently, which simplifies handling error paths, validations, and edge cases.