This paper summarizes the findings from a feasibility study of using renewable energy sources in combination with conventional power systems to meet the electrical requirements for an isolated island of Masirah in Oman. The study has been conducted to determine the best hybrid system to generate electrical energy needed for a small community of 500 residential buildings. A series of a simulation analyses have been carried out to evaluate and optimize different distribution technologies including photovolatics, wind and diesel for electrical generation in combination with storage batteries. It was found that the cost of energy could be reduced by as much as 48% compared to the cost for the baseline generation system currently used in the Masirah Island (i.e. diesel-driven generators). In particular, it was found that wind turbines in combination with storage batteries have a great impact in reducing the cost of generating electrical energy for the residential community. Moreover, solar PV panels were found unattractive under the current diesel price rates but could potentially become viable if the diesel prices increase. The paper outlines an optimal design for generating electricity for the community at lowest cost while minimizing carbon emissions.