The use of hybrid renewable energy systems (HRES) has become the best option for supplying electricity to sites remote from the central power system because of its sustainability, environmental friendliness, and its low cost of energy compared to many conventional sources such as diesel generators. Due to the intermittent nature of renewable energy resources, there is a need however for an energy storage system (ESS) to store the surplus energy and feed the energy deficit. Most renewable sources used battery storage systems (BSS), a green hydrogen storage system (GHSS), and a diesel generator as a backup for these sources. Batteries are very expensive and have a very short lifetime, and GHSS have a very expensive initial cost and many security issues. In this paper, a system consisting of wind turbines and a photovoltaic (PV) array with a pumped hydro energy storage (PHES) system as the main energy storage to replace the expensive and short lifetime batteries is proposed. The proposed system is built to feed a remote area called Dumah Aljandal in the north of Saudi Arabia. A smart grid is used via a novel demand response strategy (DRS) with a dynamic tariff to reduce the size of the components and it reduces the cost of energy compared to a flat tariff. The use of the PHES with smart DRS reduced the cost of energy by 34.2%, and 41.1% compared to the use of BSS and GHSS as an ESS, respectively. Moreover, the use of 100% green energy sources will avoid the emission of an estimated 2.5 million tons of greenhouse gases every year. The proposed system will use a novel optimization algorithm called the gradually reduced particles of particle swarm optimization (GRP-PSO) algorithm to enhance the exploration and exploitation during the searching iterations. The GRP-PSO reduces the convergence time to 58% compared to the average convergence time of 10 optimization algorithms used for comparison. A sensitivity analysis study is introduced in this paper in which the effect of ±20% change in wind speed and solar irradiance are selected and the system showed a low effect of these resources on the Levelized cost of energy of the HRES. These outstanding results proved the superiority of using a pumped-storage system with a dynamic tariff demand response strategy compared to the other energy storage systems with flat-rate tariffs.