The application of renewable energy in electric power systems is growing rapidly due to enhanced public concerns for adverse environmental impacts and escalation in energy costs associated with the use of conventional energy sources. Photovoltaics and wind energy sources are being increasingly recognized as cost effective generation sources in small isolated power systems primarily supplied by costly diesel fuel. The utilization of these energy sources can significantly reduce the system fuel costs but can also have considerable impact on the system reliability. A realistic cost/reliability analysis requires evaluation models that can recognize the highly erratic nature of these energy sources while maintaining the chronology and interdependence of the random variables inherent in them. This paper presents a simulation method that provides objective indicators to help system planners decide on appropriate installation sites, operating policies, and selection of energy types, sizes and mixes in capacity expansion when utilizing PV and wind energy in small isolated systems.