Software that enabled a utility in Washington to cut power consumption by up to 50 percent by more intelligently managing the delivery of electricity to homes and businesses will soon get a much bigger test.

This small demonstration is part of a project that will ultimately attempt to knit together aging, fragmented grid infrastructure across five states and 11 utilities to make way for electric cars and renewable energy. The project will involve 95 smaller efforts to integrate wind power, store power from the grid, accommodate electric vehicle charging, and establish “microgrids” that can survive on their own in the event of a power outage.

The software for the $178-million project is nearly complete, and the system will be up and running by this time next year, says Ron Ambrosio, the global research leader for the energy and utilities industry at IBM, one of several companies and institutions involved. The project is one of 16 smart grid demonstrations funded in part by the 2009 Recovery Act.

Some of the technology was first demonstrated from 2005 to 2007 on Washington state’s Olympic Peninsula. The technology allowed utilities to communicate with smart thermostats and other equipment at residences, reducing peak electricity demand and responding to fluctuations in supply from intermittent resources such as wind turbines.

Ordinarily, such a system would depend on changes in regulations to allow utilities to charge residential customers different prices for electricity depending on demand. But the new technology, developed by IBM, the Pacific Northwest National Laboratory, and others, makes such real-time pricing unnecessary.

The approach keeps electricity rates flat, but gives customers rebates on their power bills in exchange for having thermostats and other smart devices hooked up to communicate with the utility. The utility sends signals to the smart thermostats and appliances about how much it currently costs the utility to provide it electricity. Then, based on the preferences entered by the consumer, the smart systems in a home send signals back to the utility about how much power they will use. If costs are high, for example, the thermostat might signal that it will turn up the temperature to reduce the power consumption of the air conditioner.

The idea is catching on as far away as Denmark, where it is the basis of a project integrating renewable energy and electric cars with the grid.

When the system was tested on the Olympic Peninsula, it reduced electricity demand during peak times by 15 percent, on average. During one period of particularly tight supply for power, consumption dropped 50 percent. Consumers saved about 10 percent on their power bills.

That system involved a relatively small geographic area, and it’s not clear it will work on a larger scale. One concern that the demonstration will address, Ambrosio says, is the potential development of feedback loops that can make the system unstable. The concern is that smart devices in 60,000 homes over five large western states could cause unexpected fluctuations in demand that power generators can’t keep up with. That problem may be exacerbated when changes in weather or technical problems are added to the mix.

The project will also involve coordinating electric vehicle demand and automating responses to fallen power lines. Altogether, the smart grid project could allow utilities to make much better use of existing equipment, saving billions of dollars. By lowering demand during peak hours, it could reduce the need for utilities to build more transmission lines to meet peak demand. Smart systems could also allow existing transmission lines to carry more power (lines now carry as little as 85 percent of their rated capacity to allow for unexpected problems).

Ambrosio’s goal is to run the lines at 95 to 97 percent capacity. “We’re asking, can we eliminate outages altogether?” Ambrosio says.