The most severe power quality problems are known as voltage sag, swell and harmonics. Series connected custom power device called as dynamic voltage restorer (DVR) is the most effective device used in electrical systems to compensate these power quality problems. Traditional DVR compensates only voltage sag/swell in electrical grids. The main contribution of this paper is that FFT based a novel reference generation method is used in DVR to compensate unbalanced voltage sag/swell and unbalanced voltage harmonics, simultaneously. In this study, FFT achieves both voltage sag/swell detection and voltage harmonics extraction at the same time. FFT controlled DVR compensates voltage sag/swell within 5 ms while unbalanced selective voltage harmonics (5th, 7th, 11th and 13th) are compensated in the system, simultaneously. The system is analyzed for various case studies. The performance of proposed controller method is presented and confirmed through simulation results using PSCAD/EMTDC.