The steady supply of quality power from the distribution system is a major concern for the sensitive loads. The dynamic voltage restorer system is mainly used to compensate voltage sags and swells for uninterrupted reliable &quality power supply. Hence, this work proposes a novel combination of dynamic voltage restorer and compressed air energy storage for power quality enhancement. The main aim of this work is to replace the conventional battery powered dynamic voltage restorers with the compressed air energy storage powered dynamic voltage restorers. This article presents the design and modeling of a third generation compressed air energy storage system with zero greenhouse gas emission and high response time. Further, a compressed air energy storage powered dynamic voltage restorer (CAESPDVR) connected distribution system supplying a sensitive load is modeled and the voltage variations during various faults are analyzed. The behavior of the system with and without the compressed air energy storage powered dynamic voltage restorer is investigated. MATLAB/Simulink and SimulationX software are used for modeling and analysis.