The paper describes financial mechanisms for heat sector projects in Latvia, and presents analysis of the traditional and innovative financing schemes for promotion of the sustainable use of renewable energy resources. In Latvia, approximately 70 % of the heat supply is provided by municipal DH systems, with about 60 % of the dwellings connected to these systems. The programme of switching small boiler houses, from imported fossil fuel to local fuel (biomass) was developed by the Latvian Government in early 90-s, after restoration of the state independence. Active use of biomass for heat supply started in 1993 -1995. In the beginning this proceeded through reconstruction of old boilers for wood fuel firing and using imported technologies from Europe. In order to ensure efficient and environment-friendly heat production it is very important to have a financing mechanism, to design new financing schemes and to find modern technological solutions that will promote the switching to environment-friendly fuel and also will ensure sustainability of the system taking into account real socio-economic situation. The main of financing mechanisms are the following: commercial loans, state support scheme, attraction of European structural funds, attraction of other donor financing sources and bundling of small projects (the case study United Nations Development Program and Latvian Environmental Investment Fund).