A novel circuit configuration for compensating for the reactive power of an induction generator is proposed in this paper. This reactive power compensator includes an ac power capacitor set serially connected to a small-capacity power converter. The ac power capacitor is adapted to provide basic reactive power and reduce the voltage rating and power capacity of the power converter. Because, the ac power capacitor set can also effectively block the dc voltage generated by the power converter to the utility, the salient point of the proposed reactive power compensator is that only a two-arm structure is required for the power converter in the three-phase three-wire application. Consequently, the required number of power electronic switches for the power converter is reduced. The current, generated by the induction generator system, supplied back to the utility is sinusoidal and in phase with the utility voltage following compensation of the proposed reactive power compensator. A prototype is developed and tested to verify the performance of the proposed reactive power compensator. The experimental results show that the performance of the proposed reactive power compensator is as expected.