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 bioenergy. The material is exemplified by two regional projects on Boiler house and district heating (DH) system reconstruction and the financial options used. The paper describes analysis of the effective conversion of biomass for energy in Latvia. Analysis of Latvian energy sector development in the last years shows that it is a positive tendency - increasing role of the local and renewable energy resources in the energy balances of Latvia. Increasing utilization of biomass, wind and solar energy, biogas, etc. was happened in last years. The paper describes the present situation of renewable energy resources utilization in Latvia, as well as the possibilities for future development. Analyses of perspective scale of bioenergy utilization was worked out, taking into consideration possible level of efficient use of these resources with promoting innovative technologies and with ecological aspects of the energy sector development. 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 (coal, heavy fuel oil) to local fuel (biomass) was developed by the Latvian Government in early 90-s, after restoration of the state independence. Active use of bioenergy 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: 1. commercial loans – in case of municipalities usually are guaranteed by municipal budget; 2. involvement of private investor and signing pay-or-take contract for produced heat, 3. state support scheme – partly grant from the state budget through state investment program, 4. attracting of European structural funds financing – in case of heat sector it is European regional development Fund (ERDF), 5. attracting of other donor financing and bundling of small projects (case study United Nations Development Program (UNDP) and Latvian Environmental Investment Fund (LEIF) financing scheme for small scale projects).