Some communities in remote locations with high wind velocities and an unreliable utility supply, will typically install small diesel powered generators and wind generators to form a microgrid. Over the past few years, microgrid projects have been developed in many parts of the world, and commercial solutions have started to appear. Such systems face specific design issues, especially when the wind penetration is high enough to affect the operation of the diesel plant. The dynamic behavior of a medium penetration hybrid microgrid is investigated. It consists of a diesel generator set, a wind-generator and several loads. The diesel engine drives a 62.5 kVA synchronous generator with excitation control. The fixed-speed wind turbine drives a 60 kW cage rotor induction generator. The microgrid can be connected to the utility grid but can also run as an isolated system. The total load of the microgrid is about 100 kVA which varies during the day, and consists of static and dynamic loads, including an induction motor. The excitation controller and speed controller for the diesel’s synchronous generator are designed, as well as the power control of the wind turbine, and the controller for capacitor banks and dump load. The system is modeled and simulated using PSCAD. The study evaluates how the power generation is shared between the diesel generator set and the wind generator, the voltage regulation during load connections, and discusses the need of battery energy storage, the system ride- through-fault capability and frequency control, particularly at times when the utility is disconnected and the microgrid is run as an independent isolated power system. The results of several case studies are presented.