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Shunt active filters (SAFs) can be used for harmonic mitigation, reactive power compensation and power factor control in electrical distribution networks. Model predictive controller (MPC) can be used to give optimum performance for SAF’s due to its inherent cost function optimization. The SAF’s reference current extraction technique in finite control set-MPC (FCS-MPC) plays a vital role in the effectiveness of the SAF’s operation. The advantage of FCS-MPC is that it closely tracks the reference and injects the required compensating currents by optimizing the SAF’s switching vector and it does not require an external modulator for pulse generation. FCS-MPC can be implemented as either an optimal switching vector MPC (OSV-MPC) or an optimal switching sequence MPC (OSS-MPC) technique. The OSV-MPC technique is simple and efficient for SAF applications. In this paper, a novel reference current extraction technique, the inverse matrix average pq-synchronous reference frame (SRF) (IMApq-SRF) technique, is proposed along with the OSV-MPC technique. Practically a two-step delay compensation is essential in the implementation of the technique for the control of an SAF. Hence in this paper a two-step horizon OSV-MPC technique is proposed along with an IMApq-SRF reference current extraction technique to improve the power quality in distribution networks. The presented results show that the proposed methodology gives optimum SAF performance under a large range of supply and load conditions.