The policy decision of extending electric power transmission lines to connect a remote area to a primary grid vs. developing local electricity generation resources must be informed by studies considering both alternatives’ economic and environmental outcomes. Such analysis must also consider the uncertainty of several factors such as fuel prices, the cost and performance of renewable and conventional power generation technologies, and the value of environmental benefits. This paper presents a method for this analysis, making two main contributions to the literature. First, it shows how to characterize the two alternatives (i.e., main-grid extension vs. local power generation) in detail for precise quantification of their capital and operating costs while guaranteeing that they are both adequate to meet forecast demand and operating reserves. Second, it shows how to properly account for the economic and environmental implications of renewable energy intermittency and uncertainty through the optimization of capital investments and hourly operations. The method is illustrated by applying this analysis method to Saudi Arabia, where the government is struggling to outline a strategy to meet residential and commercial loads reliably and sustainably in the country’s remote, scattered, isolated areas. To meet this demand, the Saudi government is considering two main alternatives: (1) extending the primary power transmission grid; or (2) installing an optimal combination of off-grid distributed generation (DG) resources, including solar PV, wind, diesel, oil, heavy fuel oil, and Li-ion batteries, to generate the electricity locally. Results suggest that under most scenarios of capital costs, fuel prices, and costs of air pollution, developing a microgrid with a large share of wind and solar power is more cost-effective than extending a primary grid 150 km or more away. Extending a primary grid powered by gas-fired combined-cycle power plants is more economical only if the load is not very high, the distance is not more than 350 km, and oil prices are relatively high compared to natural gas.