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This paper presents a novel control strategy for power smoothing. The system is based on a sensorless vector controlled induction machine driving a flywheel. The problem of regulating the voltage against input power surges or sudden changes in load demand is addressed. The induction machine is controlled to operate in a wide speed range by using flux weakening above rated speed. A speed observer is used to obtain the rotational speed in the whole speed range. The observer parameters are adapted during flux weakening in order to obtain close tracking of the flywheel speed. Experimental results for the operation of the flywheel drive between zero to more than twice base speed are presented and discussed. The system described in this paper is suitable for wind-diesel generation or stand alone wind energy systems.