This paper presents an optimal control strategy using linear quadratic regulator (LQR) applied in current-controlled voltage source inverter (CCVSI) to control the real and reactive power flow between the renewable energy system (RES) and the grid. It also compensates harmonic current components drawn by the load from the grid terminal. A simplified equivalent circuit is used to develop the reduced order state space model of the three-phase grid connected renewable energy system. This makes the analysis and design of control law simpler by reducing the number of weighing variables used in LQR. The extension real–reactive power (p–q) method implemented in a–b–c frame is used to generate the reference current for controlling the real and reactive power to the grid to minimize the total harmonic distortion (THD) and to achieve unity power factor (UPF) operation at the grid side. The stated technique makes the grid current sinusoidal even under unbalanced grid voltages and the harmonic distortion factors are well within the IEEE limits. The system is simulated under changes in the real power fed from RES to the grid for both balanced and unbalanced grid conditions. The simulation results are validated by the experimental results. © 2017, Copyright © Taylor & Francis Group, LLC.