In micro-grids spinning reserves are crucial to compensate for the transient variation in generation and load. To incorporate necessary spinning reserve into the system, hydroelectric generators are operated at lower load reducing the system efficiency. In this article, a modular multilevel cascaded converter (MMCC) is used to optimize the performance of a permanent magnet synchronous generator (PMSG) based small hydropower plant. In contrast to conventional topology, the MMCC contains multiple dc-link capacitors. A super-capacitor energy storage system (ScESS) is connected at each of the dc links. Thus a high-power modular ScESS can be incorporated into the system. This high-power modular ScEES is used to supply the transient power demand of the microgrid thereby reducing the spinning reserve requirement of hydropower plants. Using a decoupled control technique the machine current and the current flowing into the grid are independently controlled from a single MMCC. Thus, the MMCC can independently control the steady power generated by PMSG and the transient power demanded by the grid obtained from the modular ScESS. Simulation results for the transient and steady-state performance validated the suitability of the proposed scheme for PMSG based small hydropower plants.