In this study, an innovative approach to matrix-converter-based AC-–AC variable frequency drives (VFDs) is introduced. The possibility of using AC–AC matrix VFDs for reactive power compensation in conventional AC–DC–AC VFD-loaded power distribution lines is investigated. It is found that the interaction of a large number of conventional AC–DC–AC VFDs with a conventional capacitor-based local compensation device leads to overcompensation in 0.4 kV power distribution lines. This is due to the fact that the conventional compensation device is designed to compensate the lagging reactive power produced by inductive loads, such as AC motors. This highlights the demand for the compensation of leading reactive power that is not predicted by the designer. To solve this problem, the modification of a certain number of previously installed VFDs by replacing their conventional AC–DC–AC converters with AC–AC matrix converters is proposed. This can lead to improvements in the power factor in 0.4 kV power distribution lines. In this study, the range of reactive power produced by conventional AC–DC–AC VFDs was determined mathematically, by simulation, and experimentally. The range of reactive power produced by the novel AC–AC matrix VFD was also determined. On that basis, the number of VFDs to be modified is defined to keep the power factor close to unity.