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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 DC-link 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 model reference adaptive system 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 induction machine between zero to more than twice base speed are presented and discussed.