A substantial untapped energy saving potential rests in the building sector and is expected to play an important role in achieving reduction of environmental impacts of energy. In order to utilise this potential, effective policy measures need to be adopted to remove the existing barriers and create incentives. For that purpose, the cost effective energy saving options together with an optimal level of savings and expected environmental benefits have to be identified. The paper reports on a study that analyses these questions by including heat-saving measures in buildings into an energy system optimisation model of the Danish heat and power sector. The achieved optimal level of heat savings reaches 11% of projected heat demand in 2025 under the model assumptions. Moreover, the analysis reveals the importance of considering energy conservation options in a system wide perspective. Furthermore, the results suggest that changes in the energy generation sector are the prime driver behind the reduction of environmental externalities of energy. Heat savings in buildings play only a small role under model assumptions. (C) 2012 Elsevier Ltd. All rights reserved.