In remote arctic communities, where access to a bulk electrical grid interconnection is not available, the implementation of islanded microgrids has been the most viable way to produce and distribute electricity services to their inhabitants. Historically, these islanded grids have relied primarily on diesel generators or hydropower resources to supply the baseload. However, this practice can result in increased expense due to the high costs associated with fuel transportation and the significant amounts of on-site storage necessary when fuel transportation is unavailable during winter months. In order to mitigate this problem, arctic microgrids have started to transition to a hybrid-source operational mode by incorporating renewable energy sources that are inherently variable in nature, such as wind or solar. Due to their highly stochastic behavior, these hybrid-source islanded microgrids can pose potential issues related to power quality due to introduction of rapid net load fluctuations and inability of diesel generators to respond rapidly. In addition, non-firm stochastic sources can require significant idling diesel generator resources to serve as spinning reserves, which is inefficient and wasteful. This work studies the problems that may arise in the transient dynamics of a real-world hybrid diesel microgrid when subjected to a loss of wind generation. Moreover, this work proposes a transition from a diesel spinning reserve to a battery energy-storage system (BESS) operating reserve scheme. The study of the proposed transition is important in establishing the fundamental implication of transient dynamics and the potential benefits of integrating a BESS as a spinning reserve in terms of stability, frequency nadir, and transient voltage deviation. The methods to investigate and validate the transient dynamics relied on both electromagnetic simulation models of GFMIs and a commercially available GFMI in an experimental power hardware-in-the-loop setup. The simulation results showed that the proposed operating reserve scheme improves the power quality of the system in terms of voltage deviation and frequency nadir when the microgrid is subjected to a loss of wind generation scenario. Depending on the simulation cases, adding a GFMI reduced the frequency nadir between 65.3% and 86.7%. Moreover, the reductions in the voltage deviations improved between 3.6% and 23.0%. From these results it can be concluded that the integration of a GFMI can reduce the frequency nadir in a hybrid diesel microgrid, and in turn, reduce diesel consumption, which improves system reliability while reducing fuel expenses. Furthermore, the novelty of this work relies on the fact that the offline simulation results were validated using a power hardware-in-the-loop platform that incorporated a 100 kVA commercially available GFMI as the device under test.