Energy Minister Eamon Ryan announced the first phase of a 1billion euro plan which will see each home and business in the country fitted with 'smart' electricity meters by 2012.
The meters show how much power is being used in the home or premises, and when. An internal memory stores patterns of consumption, and will allow suppliers to charge for energy based on 'time of use'.
Using power during busy times, in particular the 5pm-7pm peak, will incur a higher charge. At off-peak times, the tariff will be cheaper.
Customers will also be offered a "critical peak rebate", whereby they will be alerted to an upcoming peak in demand and will be given a rebate if they reduce demand.
In time, homes and business that can micro-generate their own power from wind turbines or solar panels will be able to sell the excess power back to the national grid.
The National Smart Meter Plan is expected to lead to average savings of €500 a year, and save three tonnes of carbon per home because less power generation will be needed.
Up to 21,000 homes will be fitted with the meters during the trial period, before the system is extended to all homes and businesses.
Mr Ryan said yesterday that Ireland would lead the way in installing the devices, and that the roll-out represented an opportunity for businesses.
"When customers realize how much they can save, and the carbon reductions that ensue, I believe they will find these meters one of the smartest devices ever installed in their homes,'' he said. "It is a crucial development in energy policy in this country. If we can be ahead of the game, we can develop opportunities and truly lead the world in the deployment of this new technology.
"With this smart metering plan, Ireland is leading the world. I will work to ensure that all homes have smart meters over the next four or five years. This trial phase is crucial in the ultimate successful delivery of this project."
The Commission for Energy Regulation (CER) will oversee the project. Commissioner Dermot Nolan said the plan would yield "significant benefits".
"It will help consumers use energy much more efficiently and reduce bills. Consumers will be able to make their own choices with regard to consumption," he said.
ESB chief executive Padraig McManus said the move was a "significant milestone".
"Smart metering will enable customers to carefully manage their electricity consumption," he said. "It is the first step in the development of a smart and sustainable electricity network for Ireland."
Customers might have to pay for the meters when the system is fully rolled out, the CER said, but the cost of installing the meters would be far less than the annual savings. Each meter is expected to cost about 100 euros.
Smart meters are already in use in Italy, Canada and Sweden but the Government says the system here will be more advanced.