Policy instruments clearly influence the choice of production technologies and fuels in large energy systems, including district heating networks. Current Swedish policy instruments aim at promoting the use of biofuel in district heating systems, and at promoting electric power generation from renewable energy sources. However, there is increasing pressure to harmonize energy policy instruments within the EU. In addition, natural gas based combined cycle technology has emerged as the technology of choice in the power generation sector in the EU. This study aims at exploring the role of policy instruments for promoting the use of low CO2 emissions fuels in high performance combined heat and power systems in the district heating sector. The paper presents the results of a case study for a Swedish district heating network where new large size natural gas combined cycle (NGCC) combined heat and power (CHP) is being built. Given the aim of current Swedish energy policy, it is assumed that it could be of interest in the future to integrate a biofuel gasifier to the CHP plant and co-fire the gasified biofuel in the gas turbine unit, thereby reducing usage of fossil fuel. The goals of the study are to evaluate which policy instruments promote construction of the planned NGCC CHP unit, the technical performance of an integrated biofuelled pressurized gasifier with or without dryer on plant site, and which combination of policy instruments promote integration of a biofuel gasifier to the planned CHP unit. The power plant simulation program GateCycle was used for plant performance evaluation. The results show that current Swedish energy policy instruments favour investing in the NGCC CHP unit. The corresponding cost of electricity (COE) from the NGCC CHP unit is estimated at 253 SEK MWh(-1), which is lower than the reference power price of 284 SEK MWh(-1). Investing in the NGCC CHP unit is also shown to be attractive if a CO2 trading system is implemented. If the value of tradable emission permits (TEP) in such as system is 250 SEK tonne(-1), COE is 353 SEK MWh(-1) compared to the reference power price of 384 SEK MWh(-1). It is possible to integrate a pressurized biofuel gasifier to the NGCC CHP plant without any major re-design of the combined cycle provided that the maximum degree of co-firing is limited to 27-38% (energy basis) product gas, depending on the design of the gasifier system. There are many parameters that affect the economic performance of an integrated biofuel gasifier for product gas co-firing of a NGCC CHP plant. The premium value of the co-generated renewable electricity and the value of TEPs are very important parameters. Assuming a future CO2 trading system with a TEP value of 250 SEK tonne(-1) and a premium value of renewable electricity of 200 SEK MWh(-1) COE from a CHP plant with an integrated biofuelled gasifier could be 336 SEK MWh(-1), which is lower than both the reference market electric power price and COE for the plant operating on natural gas alone. Copyright © 2005 John Wiley & Sons, Ltd.