Harmonics lower power quality and degrade system performance for sensitive electrical loads. To enhance power quality, an active power filter (APF) is usually used owing to its excellent dynamic response to reduce total harmonic distortion (THD) of the source current. An APF consists of an extraction and modulation modules. The precision of harmonic extraction improves the performance of the APF. This paper proposes the matrix pencil method (MPM) for reference current extraction in the hybrid active power filter (HAPF). Unlike the widely used time-domain instantaneous reactive power theory (IRPT), the MPM does not rely on the low-pass filter in its implementation. Modeling and simulation of the HAPF with the MPM extraction technique are carried out using MATLAB/Simulink and show that MPM achieves a better performance with lower THD and faster response when compared to IRPT.