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Harmonic suppression, grid purifying and the power quality improving are important targets of smart grid construction. Active power filter will play an important role in the building of smart grid, for its excellent dynamic characteristics of harmonic compensation. This article introduces the basic principle of parallel active power filter, and discusses the ip - iq calculating approach, based on the instantaneous reactive power theory, to detecting the harmonic current and reactive current. This article also introduces the hysteresis control principle of active power filter, and the calculation method of the main circuit switching frequency of active power filter. On this basis, the main circuit parameters can be deduced, and the harmonic compensation simulation model of active power filter could be established. By using discrete mean value block instead of low-pass filter in the part of harmonic detection, the simulation result can be better. The simulation result shows that the harmonic detection algorithm is correct, and with a reasonable control strategy, the active power filter can compensate harmonic currents effectively, improving power quality significantly.