Abstract In the era of smart grids and microgrids, the transformation of the traditional grid system brings many operational, technical, and economic benefits. However, the complexity of the network due to the integration of various distributed generations (DGs), continuous change of topology, and non-linear load make fault detection a major issue that forces power engineers to focus on. In this paper, a novel fault detection scheme is suggested based on the multivariate variational mode decomposition mode (MVMD) and differential cumulative sum (DCUSUM). As a generalized extension of the original variational mode decomposition (VMD) algorithm for multivariate data residing in multidimensional spaces, the main goal of MVMD is to decompose the input signal into different band-limited intrinsic mode functions (IMFs). Due to the inherent characteristics of being insensitive to noise and very effective in decomposing the local features even with similar frequencies, it is very effective for fault detection in microgrid distribution systems. The proposed DCUSUM algorithm computes the differential cumulative energy for the remaining significant modes. A fault detection index is considered in this approach and applied for fault detection by adaptively through the threshold setting to accurately result in fault detection. To justify the proposed approach, a standard AC microgrid test system is considered and the approach is verified for fault detection under various fault conditions and resistances. The obtained results and the comparative analysis with other methods reflect the better accuracy, robustness, and reliability of the proposed approach.