The power quality problem of a microgrid is much more serious than that of the traditional grid because of the unique bidirectional power flow，more frequent overvoltage and overcurrent phenomenon and the high harmonic penetration of the microgrid.Also，the microgrid capacity is comparatively small and it is not cost effective to install various types of power quality controller.In order to cater for the requirements of the unique power quality of a microgrid with high penetration，a novel power quality controller with multifunction is proposed by combining a variable reactor based on controllable magnetic flux and an active power filter based on fundamental magnetic flux compensation.The power quality controller features adjusting the power flow，limiting the fault current，soft starting the motor or system and isolating the harmonic.The system principle and configuration are addressed in detail.A set of three-phase multifunctional power quality controller has been constructed.The field test results have verified the validity of the novel power quality controller.