Smart grids have become one of the important and challenging topics due to the numerous benefits it can bring to the power system. In this context, distributed generation (DG) is expected to play a significant role. The smart grid can have multiple configurations depending on the smart grid operating strategy and system conditions. In smart grids, DG could be operated either grid connected or islanded. Such flexible and variable configuration results in variable fault current levels which could impact the operation of the existing protective devices on the distribution system. In this paper, it is proposed to optimally size thyristor-controlled impedance (TCI) of both inductive and capacitive type to manage the fault current levels under different smart grid configurations. The salient benefit is to avoid damage and delayed operation of protective devices due to the variability in fault currents with synchronous-based DG. The problem is formulated as a nonlinear programming (NLP) problem and the optimum size and type of the TCI is determined using particle swarm optimization (PSO). Results show that by optimally locating and sizing TCI, fault current levels under various smart grid configurations can be managed and thus avoiding protective device coordination failure and damage.