Abstract None of the EU directives on liberalisation of the electricity and gas markets are considering the district heating systems, although the district heating networks offer the possibility of competition between natural gas and a range of other fuels on the market for space heating. Cogeneration of electricity and heat for industrial processes or district heating is a technology option for increased energy efficiency and thus reduction of CO2 emissions. In the mid-1990s less than 10% of the electricity generation in the European Union was combined production with significant variations among Member States. These variations are explained by different national legislation and relative power of institutions, rather than difference in industrial structure, climate or urban physical structure. The ‘single energy carrier’ directives have provisions that support the development of combined heat and power (CHP), but they do not support the development and expansion of the district heating infrastructure. The article is partly based on a contribution to the Shared Analysis Project for the European Commission DG Energy, concerning the penetration of CHP, energy saving, and renewables as instruments to meet the targets of the Kyoto Protocol within the liberalised European energy market. The quantitative and legal differences of the heat markets in selected Member States are described, and the consequences of the directives are discussed. Finally, we summarise the tasks for a European policy concerning the future regulation of district heating networks for CHP, emphasising the need for rules for a fair competition between natural gas and district heating networks.