A novel variable reactor based on magnetic flux control is proposed in this paper. The system configuration of the novel variable reactor is presented, while its operational principle is analyzed. Based on the developed variable reactor, a novel integrated power quality controller (IPQC) suitable for microgrid is proposed, which can cater for the peculiar requirements of microgrid power quality, such as the harmonic high penetration, frequent voltage fluctuation and overcurrent phenomenon, and bidirectional power flow and small capacity. For the fundamental, the equivalent impedance of the primary winding is a variable reactor or capacitor. For the nth-order harmonic, the equivalent impedance is very high impedance and acts as a ¿harmonic isolator.¿ The system control strategy is also analyzed in detail. A set of three-phase IPQC has been constructed. The simulation results verify the validity of the novel variable reactor and the IPQC.