Since the Soviet era Estonia inherited oil-shale-based electricity plants, with a. capacity of 3000 MW. Oil shale now provides Estonia with very low electricity prices. However, most of the stations are very old. Half of them were built before 1965, and sooner or later the old oil shale production units will have to be replaced. Estonia will then have to face serious increases in electricity production prices. At the same time Estonia has problems in restoring its district heating systems. The prices are rising and many consumers have converted to other heating sources such as electric heating. The major long-term strategic policy choices to make in Estonia are to decide (1) whether the oil shale power stations should be replaced by new centralized production units such as new oil shale stations or nuclear power, or (2) whether the electricity production should be decentralized. In the centralized solution (oil shale or nuclear power), the domestic heating will be left to boilers or electric heating leading to a very high primary energy supply. In the decentralized solution, Estonia could benefit from the advantage of cogeneration leading to very low fuel consumption. But this latter strategy depends on the restoration of the district heating systems. This article seeks to form a strategy to improve the efficiency of the Estonian energy system by increasing the use of cogeneration.