This work analyses the economic and technical impact of local reactive power provision in grid-connected microgrids with distributed energy resources. Costs of reactive power provision by photovoltaic systems and battery energy storage systems are explicitly formulated and an objective function incorporating the costs is proposed. The advantage of the proposed objective function is validated by comparing it with other objective functions frequently employed in the literature. From various case studies, the extent of economic and technical benefits of local reactive power provision for the microgrid is established. Subsequently, the technical and economic competitiveness of reactive power provision using inverter-based distributed energy resources are compared against those using switched capacitors. Extensive sensitivity analyses are performed to determine the scenarios in which one technology is more competitive than the other. Inverter efficiency has been identified as the most important parameter for reactive power provision from distributed energy resources while electricity price is the most crucial factor for switched capacitors’ competitiveness in producing reactive power.