The Latvian district heating system historically is characterized with a high share of imported natural gas. The paper looks at the situation where specific policy tools significantly increase the proportion of renewables, in particular of wood fuel, in the energy balance. Within this context a system dynamics model was developed to identify the most suitable policy from the long term perspective for the replacement of the fossil fuel with the local biomass at the district heating. The policy instruments included in the model are: national subsidies for replacement of fossil fuel technologies, short-term informative campaign to decrease the investment risks related to the use of wood fuel-based technologies, implementation of Research and Design strategies aimed at the increase of efficiency of the wood fuel technology, and implementation of the Emission Trading Scheme and the CO2 taxation. The modelling results show that national level climate policy measures are substantial for promoting the use of renewable energy. The combinations of the above mentioned policy instruments significantly increase the share of wood fuel in the Latvian district heating system. In addition, the Emission Trading Scheme confirms its essential role in promoting the use of renewable energy within the district heating sector.