Why Capacitor bank should be switched off when DG is in operation?

When generation kicks on, it can cause system voltage to rise, fall, or stay the same. Capacitors banks are used to help boost system voltage. Inductor banks are used to pull system voltage down.

In many situations, capacitor banks may be required to kick ON when generation kicks on - some wind turbines "suck in VARS", or act like inductors while pushing out power. This causes system voltage to sink, and must be counteracted using capacitors.

In your situation the distributed generation may be causing unacceptable voltage increases with the capacitor bank online.