The purpose of this paper is to present a new tool for design of integrated energy systems. The initial choice of the energy system components and the way they should interact is a crucial decision which the outcome of the design heavily relies on. Use of a physical law (instead of engineering judgment) as the basis of the decision making is the main advantage of the proposed approach over conventional approaches for design of community scale energy systems. The methodology has been implemented for design of a district heating system for an existing district in arid region of Iran. The optimum level of interaction between the energy system components has been identified by employing an optimization algorithm seeking to minimize the overall cost of the energy system. Some of the relative merits of the optimum design comparing to the present energy system are 17% increase of the exergy efficiency, 10.8% reduction in the amount of CO2 production per capita and 2% reduction in overall energy related costs. (C) 2011 Elsevier Ltd. All rights reserved.