The development of combined heat and power (CHP) is determined by the EU directive (2004/08/EK), which recommends the promotion of high-efficiency cogeneration as a priority for European Community based on a useful heat demand, considering the positive effect of cogeneration regarding saving energy from primary sources, energy loss prevention and decreasing emissions. The European Climate Change Programme has mentioned cogeneration as the best way EU could use to reach the goals of Kyoto protocol. The use of energy produced through effective cogeneration positively influences the safety of power supply along with the competitiveness of European Union and its member states. The Paper proposes and simulates four development scenarios of Latvia’s cogeneration potential, pointing out the necessary amount of fuel and energy, system costs, energy cost and effect on environment.