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A novel control scheme for the dynamic voltage restorer (DVR) is proposed to achieve fast response and effective sag compensation capabilities. The proposed method controls the magnitude and phase angle of the injected voltage for each phase separately. Fast least error squares digital filters are used to estimate the magnitude and phase of the measured voltages. The utilized least error squares estimated filters considerably reduce the effects of noise, harmonics, and disturbances on the estimated phasor parameters. This enables the DVR to detect and compensate voltage sags accurately, under linear and nonlinear load conditions. The proposed control system does not need any phase-locked loops. It also effectively limits the magnitudes of the modulating signals to prevent overmodulation. Besides, separately controlling the injected voltage in each phase enables the DVR to regulate the negative- and zero-sequence components of the load voltage as well as the positive-sequence component. Results of the simulation studies in the PSCAD/EMTDC software environment indicate that the proposed control scheme 1) compensates balanced and unbalanced voltage sags in a very short time period, without phase jump and 2) performs satisfactorily under linear and nonlinear load conditions.