New generation technology, small scale generation and storage, advances in power electronics, communication and computer technologies create different possibilities and opportunities for radical changes in the power system architecture. The increasing utilization of distributed generation and islanding operation practice becomes a hot topic around the world. Power system reliability is one of the most important factors in power system planning and operation. Distributed generation and microgrid have many issues, which directly and indirectly affect distribution system reliability. The basic objective of the research described in this thesis is to investigate the reliability benefits of utilizing distributed energy resources (DERs) and microgrid operation, and give some recommendations for planning and designing microgrids.