This week, the US Senate began to craft a massive energy bill that would establish a cap-and-trade system for carbon emissions and would pour billions of dollars into renewable-energy projects and upgrades to the nation's electricity grid.

Those investments, which will come on top of the billions of dollars already provided in the recent stimulus bill, are long overdue. Lawmakers working on the new bill should pay close attention to countries such as Denmark and Germany, where the transition to energy systems based on renewable sources and small-scale generation is already far advanced.

Utilities need communication standards before they can make serious investments in the smart grid.

Among the most important lessons from these countries is that the transition demands a substantial decentralization of the electric power grid. Instead of being organized around a comparatively small number of very big power plants, as it currently is in the United States and many other countries, the new grid will have to accommodate a much larger number of local sources. These include not just renewable sources such as wind and solar, but small-scale combined-heat-and-power plants, and electricity generated from the recovery of waste industrial heat (see page 138).

This decentralization, in turn, requires a grid that is not just bigger, but smarter. With so many sources and sinks for power — and with buyers, sellers and even programmed refrigerators constantly trying to optimize their energy usage based on the power's moment-to-moment price — the electricity-moving system also has to be an information-moving system. Everything from the smart appliances, to the digital meters that will track electrons entering and exiting the wires, to the software that gives operators an overview of energy flow, have to be able to communicate with each other.

And therein lies one of the big challenges: there are no generally accepted standards for such communication. Utilities need those standards before they can make serious investments in the smart grid, as they would otherwise risk throwing money away on obsolete technology. And the manufacturers of smart-grid components want those standards to be international, as they would rather not make a different version of each product for each country.

In the United States, responsibility for forging a consensus on how the components of the smart grid will talk to each other falls to the National Institute of Standards and Technology (NIST), which received $10 million for the task in the stimulus bill. NIST should move quickly. Every day that a coal-powered factory can't work out how to sell its excess heat back to the grid means more fossil-fuel energy is wasted. And in the absence of the improvements in distribution efficiency that the smart grid can provide, impatient advocates of renewables — and impatient politicians eager to provide jobs during a downturn — are likely to go overboard on building new transmission lines.

At least some new transmission lines are inevitable — the most productive spots for large-scale wind or solar installations tend to be a long way from the population centres where power is consumed. But it is also true that large-scale transmission can sometimes be traded off against small-scale distribution. Increasing the diversity and number of generators while using digital information to distribute electricity more efficiently may extend the usefulness of current wiring.

Add to that a smaller number of carefully sited new lines, and the result may be a grid to carry the world forward into a greener age. But policy-makers shouldn't forget: bigger is not necessarily smarter.