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The electricity grid is undergoing a major transformation towards a modern and smarter grid. Unlike information and telecommunication industries, the electric power industry has been largely bypassed by technological innovation until recently. Historically, the power industry has been heavily regulated and modelled to keep the costs low. Therefore, its modernization in the past has always been of low priority. For the digital world of 21 century, however, it is essential to have a smarter grid that is able to facilitate a healthy economy, to enhance energy security, to provide more efficient and more environmentally friendly service. The objective of this paper is firstly to review characteristics of conventional grids and the weaknesses associated with them and secondly to propose a smart grid system model that will be able to incorporate interactions between the electric power system (generation, transmission, and distribution), customers, markets, operation, and the service provided.