A smart grid delivers electricity from suppliers to consumers using two-way digital technology to control appliances at consumers' homes to save energy, reduce cost and increase reliability and transparency. It overlays the electricity distribution grid with an information and net metering system.

The smart grid is made possible by applying sensing, measurement and control devices with two-way communications to electricity production, transmission, distribution and consumption parts of the power grid that communicate information about grid condition to system users, operators and automated devices, making it possible to dynamically respond to changes in grid condition.

A smart grid includes an intelligent monitoring system that keeps track of all electricity flowing in the system. It also incorporates the use of superconductive transmission lines for less power loss, as well as the capability of integrating renewable electricity such as solar and wind. When power is least expensive the user can allow the smart grid to turn on selected home appliances such as washing machines or factory processes that can run at arbitrary hours. At peak times it could turn off selected appliances to reduce demand.

The smart grid is a simple upgrade of 20th century power grids which generally "broadcast" power from a few central power generators to a large number of users, to instead be capable of routing power in more optimal ways to respond to a very wide range of conditions, and to charge a premium to those that use energy during peak hours.

The function of an Electrical grid is not a single entity but an aggregate of multiple networks and multiple power generation companies with multiple operators employing varying levels of communication and coordination, most of which is manually controlled. Smart grids increase the connectivity, automation and coordination between these suppliers, consumers and networks that perform either long distance transmission or local distribution tasks.

Transmission networks move electricity in bulk over medium to long distances, are actively managed, and generally operate from 345kV to 800kV over AC and DClines. 

Local networks traditionally moved power in one direction, "distributing" the bulk power to consumers and businesses via lines operating at 132kV and lower. 

This paradigm is changing as businesses and homes begin generating more wind and solar electricity, enabling them to sell surplus energy back to their utilities. Modernization is necessary for energy consumption efficiency, real time management of power flows and to provide the bi-directional metering needed to compensate local producers of power. Although transmission networks are already controlled in real time, many in the US and European countries are antiquat by world standards, and unable to handle modern challenges such as those posed by the intermittent nature of alternative electricity generation, or continental scale bulk energy transmission.