Over the years, all-electric-ships (AES) have gained importance due to the reduced losses and superior features as compared to conventional ships. However, several power conversion stages are needed in this type of configuration which results in added system complexity. Propulsion loads are the highest power consuming loads with considerable amount of power electronic interfaces. This paper proposes the incorporation of smart transformer (ST) into a ship microgrid in place of the conventional bulky power transformers. Such a system enables saving of space as well as availability of two dc links to integrate renewable energy sources and energy storage systems. Further, it eliminates the need of additional power converters such as static compensator (STATCOMs), power factor correction devices, capacitor, etc. Moreover, as the service loads are supplied power through power electronic interfaces, disturbances appearing from propeller load variations do not appear in the ships distribution system. Simulation results validate the operation of proposed ST based ship microgrid.