Renewable energy (RE) sources play an important role that not only reduces the pressure on fossil fuels but also produces safe and clean energy by developing the microgrid (MG) technology that fulfills the excess demand for power throughout the world. The technological development and the blessing of information and communication technology converts the MG technology to a smarter one, termed as smart grid (SG) and virtual power plant, by establishing a two‐way communication between the consumers and service provider with the aid of smart metering infrastructure, dynamic pricing scheme, energy management system, smart transmission and distribution system. The transformation of the traditional power system to SG enhances the efficiency, flexibility, resiliency, and robustness of the power system due to the increasing level of cyber security and automation. A directional pathway from conventional to smart power system has been carried out in this paper by addressing the present status of the power system, challenges during the operations, and possible solutions. Initially, the control operation of MG with RE and energy storage system has been investigated which is essential to understand the operation complexity and challenges due to the variable nature of the RE, load dynamics, and uncertainties. But the facilities of end‐user feedback, dynamic pricing scheme, cyber security, and smart metering system are not present in MG technology that hampers the proper regulation of controlling operation, generating and distributing energy as well as energy losses. The development of SG with smart technologies overcomes these problems by proper controlling of power usage. Finally, this paper provides a path to move the MG toward SG by analyzing the technical and critical challenges of smart devices, equipment integration, and their control issues and provides possible solutions to overcome the integration and control challenges for a reliable and sustainable operation.