Can you remember a time before the internet? Those long-gone days when information gathering meant a day in a dusty library. When mass communication meant hundreds of faxes and thousands of letters. It's hard to believe we ever managed to run businesses or social lives without it.

And now the energy markets are set for a similar, seismic transformation. The smart grid -- aspects of which are powered by exactly the same technology and protocols that underpin the internet -- will change the way we see energy provision for ever.

But what exactly do we mean by this much-discussed, but poorly defined concept? The smart grid has become something of a clothes horse in the last few years, with plenty of things being thrown at it, but no clearly styled model emerging from the confusion.

Like the internet, the smart grid is often misunderstood. Just as the world wide web is not the internet, but rather an application that runs on it, nor are new domestic energy displays synonymous with the smart grid. They are simply gadgets that are facilitated by it.

Put very simply, the smart grid is a network that uses IT to deliver electricity efficiently. It has a number of characteristics that differentiate it from the existing grid. Firstly, it enables greater consumer participation. No longer passive recipients of power, customers will have more opportunities to interact with suppliers and other participants on the grid and, thanks to two-way information about energy use and pricing incentives, the motivation to change behaviours.

The smart grid will support multiple generation options, and will incorporate greater levels of energy storage -- for example electric cars -- to help balance the disparities between supply and demand.

It will also be far more resilient than our current model. Intelligent sensors throughout the grid will give us a much clearer picture of what is happening at the critical levels below sub-stations and will enable the grid to work round outages. So if one portion of the grid goes down, the sensors will spot the incident and divert electricity from an alternative source to fill the gap. In other words, it will be self-healing. Again, this is similar to internet protocol, which identifies the quickest path through a multitude of congested network connections to deliver information as rapidly as possible.

All these qualities will aid operational efficiency for the electricity system as a whole -- as well as for the individual suppliers who benefit from greater asset optimisation throughout their portfolios.

Crucially, it will also support large-scale low-carbon generation by addressing the issues that arise from greater penetration of intermittent renewable energy sources, particularly their variable and unpredictable outputs.

Not surprisingly, this intelligent, interconnected network is by no means a straightforward proposition. It has a lengthy ingredients list, and so requires extensive deployments of hardware and software to make it work. These are best seen as three distinct systems, although there are interdependencies between all three: household, distribution and software.

The most obvious component at the household layer is the smart meter. Smart meters, which store detailed data on energy usage and transmit and receive information, are critical to the wider smart grid, since they are the channel through which suppliers and consumers communicate. This two-way exchange of information will enable consumers to be far more proactive participants in the energy system. We can also expect to see some form of demand response technology, where the energy consumption of power-hungry appliances in participating households is automatically reduced or adjusted based on real time energy information communicated through the smart meter. In the majority of cases, it's unlikely the households that signed up to a tariff that included demand response would even notice that anything had happened; it could be as unobtrusive as a 30 minute pause in a washing machine cycle. This could happen when the available generation or transmission capacity looks likely to be exceeded, eliminating the need to have standby generation running on the off chance of a spike in demand.

To make this happen, the transmission network, the national-scale system through which electricity is transferred at very high voltages, will need to be expanded in response to the integration of low-carbon sources. It's all very well building highly efficient wind turbines in blustery Scotland, but electricity needs to be transported to population centres in other parts of the country.

When it comes to distribution, the regional transfer of electricity at lower voltages than the transmission network, things get more complicated. This is where advanced utility control systems need to be deployed in substations and other assets like wires. Such a network provides the sensors and controls that will improve the system's resilience and allow it to integrate distributed low-carbon generation from households and businesses.

There is also a brand new element to the distribution layer that needs to be built: the communications network. Operating in parallel with the electricity grid, this network distributes data between all elements of the new intelligent grid. It is possible that every smart meter could have its own IP address, and that IP will become the de facto communication protocol. But whatever the final design, the communications infrastructure will need to be protected from viruses, malware, denial-of-service attacks -- in fact, from all the threats faced by any other communications network.

The final element is software. Enterprise-level software is required to present, interpret, analyse and react to the huge amount of data flowing through the system. Utilities' back offices will need to be integrated with billing and asset management systems to ensure that customers see the benefits of their response to changing price signals, and the network is operating at a level to support and respond to fluctuating requirements.

Nonetheless, the biggest challenge is that all these elements need to work together. Building a smart grid requires choices to be made, and there are a multitude of interdependencies that must be identified, understood and negotiated.

There are plenty of opportunities for standards to be drawn up and implemented to ensure interoperability, since no single provider will deliver all elements. Again, this is fraught with potential danger, since there are also plenty of opportunities for the law of unintended consequences to come into play. Standardise at the wrong layer, or for the wrong piece of individual equipment, and the smart grid may lose some of its fluidity and flexibility, hindering potential growth in the future. Only one thing is certain: the functionality we put in place now is only the start of a whole swathe of potential applications in the future.

There is also the natural question of how the costs of all this will be met. Consumers still appear to be opposed to the introduction to smart metering -- never mind the smart grid -- almost certainly because of fears that the costs involved will result in severe hikes to energy bills.

For the typical household consumer, this technology remains something of an enigma. However, the data provided by smart meters will be streets ahead of what consumers currently receive from their energy suppliers. Many advocates of smart metering compare the current system of energy billing to buying food in a supermarket, taking it home and eating it. Three months later you receive an unitemised bill with no information on what you bought, the money you saved or how your shopping list compares to other rival supermarkets. Smart meters will give consumers a far clearer picture of their energy usage and will give them the information they need to change the way they consume this energy.

Utilities will certainly see efficiencies and cost savings derived from reducing periods of unprofitable down time, fault elimination, un-manned intervention and asset utilisation -- all of which might be regarded as easy wins with the potential for swift realisation.

But these early pickings are probably not enough to justify the expense. Italy has already spent E2 billion, but that was simply on installing smart metering rather than the whole grid. The $4 billion that the US has set aside for smart grid initiatives is close to the sum required to buy a smart meter for every house, and leaves little for strengthening transmission and promoting standardisation.

Generally speaking, estimated costs have not taken into account the utilities' desired return on investment. And utilities will need to investigate ways of building new relationships with consumers, and find ways of using the enhanced, enterprise-level information that they are able to generate to create real value for consumers.

The utilities will clearly need to look at new business models in response to the huge changes in the industry prompted by the advent of a smart grid. The UK has set up a government-sponsored committee to investigate smart grid options, including the standards and communications involved. Fortunately, before it comes to its final conclusions and commits itself to a particular model, there are opportunities to look abroad for examples of success and failure.

The US is probably the closest to having a finalised version of a smart grid, and Texas -- the biggest wind power generator of all US states -- in particular has benefited from incorporating demand response technology to ensure that its substantial wind resources are efficiently used. The Texas Panhandle, well known for its typically windy conditions, is home to some 2,000 wind turbines. One night in February 2008, grid operators panicked when the wind tailed off and the turbines ground to a halt. The resultant drop in power threatened to cause an electricity blackout across the state. However, demand response kicked in to save the day, adjusting electricity consumption in response to this supply emergency by temporarily dimming lights and shutting down refrigerators.

Despite the challenges ahead, the smart grid will transform the way energy is produced, bought, sold and consumed. Once in place, we will look back and try and recall what the energy industry was like before. And, just like modern technology in almost every other sphere, we will scratch our heads in wonder at how we ever coped without it.