Renewable energy is increasingly recognized as the best way to meet the needs of a growing global population for inexpensive electricity while minimizing the use of fossil fuels. In this thesis, solar PV, diesel generator, battery bank and bidirectional converter are considered to be used in the rural areas of Daror Town in the Somali region of Ethiopia. Daror Town hybrid microgrid system design provides service to 1400 households, each with an average of six family members, as well as schools, health facilities and public services. The power capacity was 805 KW and the total load demand was 3,022 kWh/day. The MPPT algorithm based on incremental conductance (INC) is put in place to extract the maximum power possible from the PV array. HOMER software to evaluate performance, sensitivity and comparative cost analyses of various operational situations. The simplified model of a hybrid microgrid built in the MATLAB/Simulink environment can be used to simulate and examine different microgrid properties in various scenarios. When there is excess energy generation, solar PV array is regarded as a key source for supplying electricity straight to the load and charging the battery bank. The generator exists to supply power to the AC bus in case of a shortage of production from the solar PV array and can also be used to charge the batteries. The state flow technique is used in this paper to design an energy management controller (EMC) for a hybrid solar PV, diesel generator and energy storage battery power system. The optimized energy system has a total net present cost of $3,955,528 and an energy cost of $0.277/kWh. Keywords: Microgrid, HOMER, MATLAB, solar PV, battery, diesel generator.