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The Lithuanian Energy Strategy sets out the main principles of the State Energy Policy, amongst them the retention of existing DH systems where they are economically sound. There have been no exhaustive economic investigations on this matter, so this principle lacks an economic basis. District heating systems (DHS), which were developed during the period of planned economics, should be renovated to become compatible with the new conditions of market economics, or should be replaced with alternative heat supply solutions. DHS are still the dominant heating source in Lithuania's towns, they provide the heating needs of over 60% of the residential sector in towns. This share is lower in small towns (10-20%), however, these systems often provide also heat to public buildings. This investigation focuses on the economic viability of technological renovation projects for DHS. It is based on future investment costs, available fuel resources and revenues from energy supply in an open energy market. This paper presents an economic analysis of heat generation costs for a variety of technological solutions and capacities, suited to the needs of heat consumers in small towns. The analysis covers economic costs of heat generation in individual buildings, central boiler-houses and Combined Heat and Power (CHP) plants [ABSTRACT FROM AUTHOR]