Current power systems create environmental impacts due to utilization of fossil fuels, especially coal, as carbon dioxide is emitted into the atmosphere. In contrast to fossil fuels, renewable energy offers alternative sources of energy which are in general pollution free, technologically effective and environmentally sustainable. There is an increased interest in renewable energy, particularly solar and wind energy, which provides electricity without giving rise to carbon dioxide emissions. This paper presents economic analysis of a renewable hybrid system for a subtropical climate and also investigated the impact of renewable energy sources to the existing and future smart power system. The daily mean global solar irradiance and three hourly mean wind speed have been collected from the Rockhampton Aero Weather Station, Queensland (RAWS), Australia for this study. Hybrid Optimization Model for Electric Renewable (HOMER), a computer model developed by National Renewable Energy Laboratory (NREL) has been used to perform comparative analysis of solar and wind energy with diesel and hybrid systems. Initially total net present cost (NPC), cost of energy (COE) and the renewable fraction (RF) have been measured as performances metrics to compare the performances of different systems. For better optimization, the model has been refined with sensitivity analysis which explores performance variations due to wind speed, solar irradiation and diesel fuel prices. From the simulation, it is shown that there are a number of factors that impact the integration and performance of renewable energy sources to the power systems.