This paper presents a method for optimal sizing and operation of a battery energy storage system (BESS) used for spinning reserve in a small isolated power system. Numerical simulations are performed on a load-frequency control (LFC) dynamic simulator of the isolated network. A novel control algorithm using adjustable state of charge limits is implemented and tested on a BESS dynamic model. An optimal sizing procedure of the BESS is developed for an isolated power system in order to achieve highest expected profitability of the device. The BESS can increase significantly the power system stability, the grid security, and the planning flexibility for a small isolated power system with low grid inertia. Meanwhile, it fulfills the frequency control requirements with a high expected economic profitability.