This paper presents a novel ‘mix-mode’ energy management strategy (MM-EMS) and its appropriate battery sizing method for operating the microgrid at the lowest possible operating cost. The MM-EMS is developed by combining three proposed operating strategies, namely “continuous run mode”, “power sharing mode” and “ON/OFF mode” for a 24 h time period. The objective functions for the proposed strategies are solved using linear programming (LP) and mixed integer linear programming (MILP) optimization methods. A sizing method using the particle swarm optimization (PSO) technique to determine the optimal energy capacity of battery energy storage (BES) in kWh is also presented. Since the size of the BES influences the microgrid's operating cost, the energy management strategy (EMS) and BES capacity are simultaneously optimized. The proposed MM-EMS and battery sizing method were first validated. Then, the variation of optimal battery capacity for different battery state of charge (SOC) levels is analyzed. The variation of microgrid's associated costs for different battery's initial state of charge (SOC) levels is analyzed as well. Finally, a recommendation on the choice of initial SOC level during the start of the day for the economic operation of microgrid is also suggested.