This paper reviews the economic implications of power production in small island developing states (SIDS). To date electricity generation is primarily based on fossil fuels creating serious economic and financial difficulties. It is argued that renewable energy technologies (RETs) have the potential to undercut the cost of current modes of electricity generation. This is primarily due to an abundance of renewable energy resources and characteristics specific to SIDS that make fossil-fuel-based electricity production extremely expensive. However, this requires a change not only of energy policies but also of scope and structure of electricity planning. So far energy policies aiming to promote RETs on SIDS have neglected to study the immediate and future technological feasibility of such programmes. However, this has serious implications on the cost of electricity supply systems and need to be considered alongside the dynamics of energy markets to allow capturing economic risks and benefits also in the long term.