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This paper discusses the application of unified power quality conditioner (UPQC) for improving power quality of a system supplying an electric arc furnace (EAF). The UPQC comprises combined series and shunt active filters sharing a common DC link. It is used to mitigate voltage disturbances and compensate for reactive power, harmonics and interharmonics. A novel control strategy of the UPQC is presented. Since voltages at the point of common coupling (PCC) contain low frequency interharmonics, conventional methods cannot be used for extracting voltage reference signals. In the proposed method, voltage references are extracted using active power processing to generate sinusoidal waveforms. Current compensating signals are detected based on current vector mapping on a rotating reference frame constituted by instantaneous phase voltages. A real system is simulated using a three-phase EAF model. Simulation results are presented to verify the control strategy and to assess the performance of UPQC in improving quality of power.