Load demand in small autonomous island systems is typically covered by Diesel Units (DU). Although a favourable renewable energy source (RES) potential might exist, the technical constraints introduced by the conventional generators result in relatively low RES penetration levels, typically up to 15%-20% of the annual energy demand. To overcome such limitations, introduction of energy storage is necessary. In the case of very small islands (less than 1 MW peak load), lead-acid battery energy storage systems (BESS) constitute a technically mature solution with considerable application potential. In this paper, the potential for achieving very high RES penetration levels with the introduction of BESS in an existing small island system is investigated. An operating policy is first introduced for the overall system, including conventional generators, RES (wind and photovoltaic) stations and storage system. Simulation results are then presented to quantify the expected energy benefits in terms of RES energy penetration and the impact on the economics of the island system. The sizing of the hybrid system components is then investigated by conducting a parametric analysis and then optimized by applying genetic algorithms.