This paper investigates the development of neighbourhoods with ambitious emission targets in the Nordic countries and their value for the power system. The targets relate to compensating for emissions in neighbourhoods through local low-carbon electricity and heat production. The first part of our analysis investigates local generation expansion with a neighbourhood perspective using a mixed integer linear programming model. The second part investigates the value of representative neighbourhoods with a country perspective using a generation and transmission capacity expansion model. When coupling the models, results indicate that neighbourhoods with co-generation of electricity and heat are most attractive for the power system in the Nordics, while neighbourhoods with solar PV provide most emission reduction.