Power electronics load is considered to be a strengthening factor that leads the system operators more concerned about power quality issues. Poor power quality can lead to distinctive operation of electrical components and devices, which may cause heavy economic loss to the customers and power network operators. An application of fractional order PIλDμ (FOPIλDμ) controller for power quality improvement in smart power distribution systems is presented here. Analytical design steps are presented for the FOPIλDμ controller. A genetic algorithm is used for tuning the control parameters of the FOPIλDμ controller optimally. The FOPIλDμ controller is employed and evaluated for shunt active power filter (APF) to filter out harmonics and improve reactive power compensation for non‐stationary, non‐linear load conditions for a smart power distribution system. Effectiveness of FOPIλDμ controller for instantaneous reactive power theory based PQ control algorithm applied to shunt APF is validated using a small‐scale laboratory experimental setup. The experimental results confirm the excellent performance of the FOPIλDμ controller in terms of its superior transient response, significant reduction in harmonic distortion, and improved reactive power compensation in a smart grid environment.