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A novel control strategy is proposed based on topology of transformer-isolated multilevel H-bridge inverter for DSTATCOM. Rotating coordinate transformation is used to determine the compensation currents for unbalanced load. A control method of single-phase instantaneous reactive power theory is designed to improve the dynamic response speed of DSTATCOM. According to the structural characteristics of the main circuit of inverter, a technique of carrier phase-shifting PWM is put forward to eliminate harmonic. Finally, the simulation results show that the validity of the proposed control strategy, this method can be applied to compensate power quality problems in three-phase three-wire system.