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This paper presents a simulation study of operation and control of distributed generators (DGs) in power islands in Smart Grid environment. It examines the technical feasibility of DG islanding operation to exploit their services for improving electrical safety, security and quality of energy supply. The grid-connected DGs are initially operated at PQ mode and then switched to V-f mode to have full controllability of bus frequency and voltage when operated as independent power island. Suitable controllers are designed separately for individual control of voltage and frequency at the DG bus. The simulation results are validated through several case studies using DIgSILENT software for both intentional and unintentional loss of grid (LOG) situations. It has been observed that when several islanded DGs are interconnected to form a power island, they can share the active and reactive power demands of the island leading to quick restoration of the system voltage and frequency within permissible bandwidth.