European Union has set ambitious decarbonization goals under Green Deal, therefore, Latvia needs to search for solutions on how to move towards reaching the said goals. Although renewable energy share in Latvia is one of the highest among the European Union countries, it is mostly due to historic heritage, not as the result of implementing meaningful policies. Essential high renewable energy share in power sector comes from three large hydroelectric stations on Daugava, which is heritage from the Soviet Union times. Steady increase in renewable energy share can be observed in District Heating, however it is based on increased utilization of biomass, and that most likely is not a sustainable solution. Considering that bioeconomy will experience significant growth in the future, utilization of wood resource for production of products with low added value will steadily phase out. For energy sector it means the necessity to look for other alternatives to replace fossil fuels. If in other European countries (Denmark, Germany, the Netherlands, Lithuania, Estonia, et al.) solar and wind technology capacity have significantly increased over last decade, in Latvia this increase is negligible. Only in the last few years significant increase in installed solar capacities can be observed, but total capacity is still low. Latvia needs to seek solutions on how to increase the introduction rate of renewable energy technologies in order to move towards carbon neutrality in 2050. The aim of the Thesis is to develop a comprehensive system dynamics model which can be used to analyze energy sector at both national and local scale. It should include both heating and power sectors and be able to evaluate the possibility of sector coupling and its influence on the total system. Specific objectives are set to reach the aim: to develop a system dynamics model structure for heating system development; to analyze the heating system at local and national scale; to assess the importance of power sector flexibility on system development; to implement the elements of sector coupling in energy system; to analyze sector coupling as a flexibility increase measure for national scale and local systems.