Different kinds of power quality can be sensed in a smart substation. Power quality sensing and analysis are basic functions of a smart substation for situation awareness. The uncertainty principle, which states that the time uncertainty and frequency uncertainty cannot be minimized simultaneously, is a bottleneck problem that undermines the faithfulness of sensing and confines the accuracy of analysis. This paper studies the influence of the uncertainty principle on the power quality monitoring issue in detail and solves the problem by ideal atomic decomposition (IAD). The new method employs a pair of time and frequency bases where the power quality waveform is sensed. Then, both time uncertainty and frequency uncertainty can be minimized simultaneously. The sensing process is realized by orthogonal matching pursuit (OMP). By simulated and field power quality tests with comparisons of developed methods, the new method can give faithful sensing and accurate analysis for various power qualities, and is validated as an effective power quality monitoring method in smart substations.