This paper presents a novel voltage source converter (VSC)-based hybrid power filter compensator (HPFC) scheme for effective reactive power compensation and harmonic reduction in distribution grid networks with the dispersed wind energy interface. A novel multi-loop dynamic error-driven controller equipped with an auxiliary DC-side voltage tracking loop is introduced to ensure a robust and fast control of the HPFC. Based on digital simulations, the effectiveness of the proposed HPFC scheme is fully validated in a unified sample wind-energy embedded distribution system under wind velocity excursions and electric load disturbances. The dynamic performance of the HPFC is compared with that of the conventional active power filter (APF) and that of the passive power filter (PPF), respectively. Copyright (C) 2008 John Wiley & Sons, Ltd.