Abstract In this paper, a novel configuration of microgrid with incorporation of turbo-expander (TE) has been presented. The cooling and electrical energy recovered by TE are used to supply the microgrid demand. The purification and preheating processes are imbedded on the inlet gas, which, according to the need, provide and control the recovery of electrical energy and cooling. Due to the unique features and limitations of TE, determination of type and optimal size of energy resources in this microgrid is special; so an innovative optimal capacity sizing (OCS) method was presented. For determination of optimal size of TE, the constraints and needs of the local natural gas (NG) network should also be considered, which, differentiates it from other energy sources. Another key feature of the proposed OCS method is optimization of inlet NG temperature passing through TE. Performance and economic evaluation of the TE-based microgrid was compared with the traditional microgrid without TE. Analysis showed that O&M and emission costs of the TE-based microgrid were reduced significantly (about 27% and 30%, respectively) culminating in low prices for the generated energies. In addition, net present value and internal rate of return of the TE-based microgrid were higher (38.5% and 6%, respectively).