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The European Union has given a long-term commitment towards a low-carbon society. Power sector is to play an important role in achieving ambitious emission reduction goals. This article presents results of a research aimed at evaluating development of the Baltic power system under current framework conditions. Special focus is put on renewable energy analysis to estimate the potential of power sector decarbonization. A dynamic energy-economy model was developed by applying system dynamics modelling approach in order to evaluate changes in the energy system till 2050. Underlying structure of the model is based on energy resource flows according to the national electricity mix of each Baltic State. The model calculates energy generation costs of each technology taking into account national support schemes. Based on cost estimation, the installed capacity of each energy resource is determined. Modelling results suggest that wind energy has the potential to become dominant in the Baltic region. This is explained by increasing competitiveness of wind-generated power price compared to fossil-fuel-based generation. Solar energy has the potential to become popular from 2025 onwards due to decreasing investment costs. The market share of other renewable electricity technologies, such as hydro and biomass, will continue to increase reaching maximum between 2020 and 2030. Biogas plants are still not expected to play considerable role in electricity generation. [ABSTRACT FROM AUTHOR]