A hardware-in-the-loop (HIL) electrical grid simulation system and method that combines a reactive divider with a variable frequency converter to better mimic and control expected and unexpected parameters in an electrical grid. The invention provides grid simulation in a manner to allow improved testing of variable power generators, such as wind turbines, and their operation once interconnected with an electrical grid in multiple countries. The system further comprises an improved variable fault reactance (reactive divider) capable of providing a variable fault reactance power output to control a voltage profile, therein creating an arbitrary recovery voltage. The system further comprises an improved isolation transformer designed to isolate zero-sequence current from either a primary or secondary winding in a transformer or pass the zero-sequence current from a primary to a secondary winding.