Sweden as well as the three Baltic states has an abundant supply of biomass, mostly wood waste. Much of it goes into district heating (DH), which has expanded continuously since the first system started 50 years ago. DH now accounts for 43% of the heating consumption and a further expansion is possible in many directions. Firstly existing DH systems can be enlarged, secondly DH can be upgraded to combined heat and power (CHP) to a much larger extent, thirdly new DH (and CHP) systems can be implemented in many smaller places down to 1000 inhabitants or less. The last alternative, biomass and especially pellets fired small-scale cogeneration in combination with local heating networks, is the topic for this paper. It presents a method to estimate the potential for small-scale DH and CHP and results from a "test" area in southeast Sweden. The method estimates local heat demand using databases with individual and statistical property data. It identifies areas with clusters of buildings where the heat demand is enough to implement decentralized small DH networks if possible in combination with small-scale CHP. In the event for Swedish circumstances very sparsely populated test area of 36 x 48 km(2) with around 8000 inhabitants, the total heat consumption in residential buildings is estimated to 84 GWh. When we have identified the areas with clusters of buildings, we have set the minimum heat consumption in such an area to 500 MW h. The area size is varied in 250 m steps from 250 x 250 m(2) to 1000 x 1000 m(2). For the four area sizes, the method then identifies and locates 30, 38, 38,30, respectively, clustered areas with a potential for small-scale DH and CHP worth investing closer. (C) 2004 Elsevier Ltd. All rights reserved.