The Department of Energy and Climate Chance (DECC) estimated the cost of replacing the country's 47 million meters with smart meters by 2020 to be around 8.6 billion pounds (US$14.25 billion) and will publish a detailed smart grid route map in early 2010.
"Smart grids will help manage the massive shift to low carbon electricity such as wind, nuclear and clean fossil fuels," energy minister Lord Hunt said.
"Globally the business of developing smart grids has been estimated at 27 billion pounds over the next 5 years and the UK has the know-how to be part of that."
It is the first time the government has talked about a smart grid, and it will provide 6 million pounds to develop smart meter technologies. The energy regulator Ofgem will make 500 million pounds available over the next five years for large-scale smart grid trials.
The government also called for communications across the new national smart grid to be managed centrally, while maintaining metering competition.
All suppliers would be obliged to use the central function under license.
DECC said utility companies would be responsible for installing smart electricity and gas meters in all British homes and most small businesses by the end of 2020.
Smart meters are seen as a first step toward creating smart grids and could reduce energy demand by cutting power to appliances that do not need continuous power, such as washing machines and laptops with batteries.
Director of British Gas smart metering, Peter Allison, said it estimated energy savings from smart meters to be around 2-3 percent, around the same as government estimates.
The opposition Conservative party said the timescale for smart meters was too long.
"Sticking with the same slow timetable for rollout by the end of 2020 will leave the UK lagging behind yet again," Greg Clark, shadow energy and climate change secretary said.
Under the Conservatives all homes would have smart meters by 2017 at the latest, Clark added.
But green campaigners and utilities have largely welcomed the announcement.
"A radical overhaul of the electricity system is desperately needed to help cut UK emissions — smart meters and the new smart grid have a key role to play in achieving this," Andy Atkins, executive director at Friends of the Earth said.
Utility Scottish Power, part of Spain's Iberdrola, said it would ramp up smart meter trial and install an additional 100,000 meters within two years in light of the announcement.
"The task is challenging but achievable," Finlay MacDonald, head of smart metering at Scottish Power, said.