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This paper studies a novel energy-saving hydraulic system, where a regeneration unit consisting of a hydraulic motor and an electric generator is used to take the place of a conventional pressure compensator. Thus hydraulic energy can be regenerated rather than dissipated in the compensator while load compensation function can be realized by adapting the electromagnetic torque of the generator to the loaded pressure. Modeling of the system is implemented and a simple feedback controller is designed based on pressure drop estimation. The proposed system and control algorithm are applied to an experimental platform of hybrid hydraulic excavator which is equipped with electrical energy storage elements. The experimental results show that expected control performance and significant energy saving can be obtained.