A single phase AC microgrid system with Unified Power Quality Conditioner (UPQC) and renewable energy source (solar) is combined with minimum number of buses which are interconnected in our system. The UPQC controller is designed to calculate the compensation current, voltage and power. The Pulse Width Modulation (PWM) converter is used to given triggering pulse to Voltage Source Inverter (VSI). The custom power device is used to compensate the power flow and increase voltage stability and suppress harmonics. After calculating the instantaneous real and imaginary power, the compensating reference current and voltage are calculated. Voltage stability occurs due to large electrical distance between source and load. The application of reactive power compensation or load shedding may prevent this type of voltage stability. The harmonics are generated by non linear load. These harmonics are eliminated by using UPQC device. The single phase AC microgrid system is also used to control the UPQC device, to maintain the power flow and improve Power Quality. The prototype implement in hardware.