A microgrid is an appropriate concept for urban areas with high penetration of renewable power generation, which improves the reliability and efficiency of the distribution network at the consumer premises to meet various loads such as domestic, industrial, and agricultural types. Microgrids comprising inverter-based and synchronous generator-based distribution generators can lead to the instability of the system during the islanded mode of operation. This paper presents a study on designing stable microgrids to facilitate higher penetration of solar power generation into a distribution network. Ageneralized small signal model is derived for a microgrid with static loads, dynamic loads, energy storages, solar photovoltaic (PV) systems, and diesel generators, incorporating the features of dynamic systems. The model is validated by comparing the transient curves given by the model and a transient simulator subjected to step changes. The result shows that full dynamic models of complex systems of microgrids can be built accurately, and the proposed microgrid is stable for all the considered loading situations and solar PV penetration levels according to the small signal stability analysis.