This paper presents the results of a municipal energy system analysis where the role of district heating is emphasised. A simplified energy system model based on linear programming is used to study the impact of introducing biomass based district heating in the community. Based on existing situation, some cases are outlined where district heating with varying degree is included as an option. Based on the assumed input data the analysis shows that district heating can play an important role in reshaping the municipal energy system which is dominated by electricity and fossil fuels. A substantial reduction of CO2 emissions can be achieved by replacing fossil fuels and electricity. There is also a possibility to improve local environment by replacing inefficient wood combustion which gives high values of particulate emissions and other harmful compounds. Unlike individual heating, district heating is associated with distribution costs that may be critical to its profitability (particularly in low heat demand areas). In addition, one should keep in mind the need for investment in possible building conversion (switching to hydronic heating system) measures. In relation to today's energy costs, the total distribution cost of district heat appears to be at such a low level that this together with the assumed fuel prices and investment cost could provide favourable conditions for district heating. If viable, there is also potential for local combined heat and power production. (C) 2012 Elsevier Ltd. All rights reserved.