This paper presents a novel control strategy for power smoothing in generation systems in which power flow variations can occur. These variations are the norm in wind energy generation. The system is based on a sensorless vector controlled induction machine driving a flywheel. 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. In order, to tune the,speed observer and compensate for the parameter variation and uncertainties, a separate estimation of the speed is obtained from the rotor slot harmonics using an algorithm for spectral analysis. This algorithm can track fast dynamic changes in the rotational speed, with high accuracy. The control strategies have been experimentally verified on a 3.5-kW experimental setup with an induction machine and flywheel. The experimental results show the high level of performance obtained with the proposed sensorless vector control system.