This paper presents a dynamic model of modular multilevel converters (MMCs), which are considered as an effective interface between energy sources and the power grid. By improving the converter performance, appropriate reactive power compensation is guaranteed. Modulation indices are calculated based on detailed harmonic evaluations of both dynamic and steady-state operation modes, which is considered as the main contribution of this paper in comparison with other methods. As another novelty of this paper, circulating current control is accomplished by embedding an additional second harmonic component in the modulation process. The proposed control method leads to an effective reduction in capacitor voltage fluctuation and losses. Finally, converter’s maximum stable operation range is modified, which provides efficiency enhancements and also stability assurance. The proficiency and functionality of the proposed controller are demonstrated through detailed theoretical analysis and simulations with MATLAB/Simulink.