> When the documentation talks about instances, are this the same as instances on azure where you can deploy one package and within the azure management scale it out to two or more instances.
Instances are meant as 'azure instances' - number of servers running your package.
> If that's the case, how can one set a unique name for each instance as its only set once when the package is deployed?
You cannot - each instance is a "mirror" that will work along side all the other instances to handle traffic. Since they are not unique, they can not be uniquely configured. A unique name is given automatically, but this is something like "(deployment name)-(instance number)".
It is safe to turn up the instance count. When new instances are deployed they will spend the first minutes synchronizing and won't be responsive, but that should be the only down side do increasing instance count.