•MILP tool for optimal sizing and location of heating and CHP plants to serve residential energy demand.•Trade-offs between local vs centralized heat generation, district heating vs natural gas distribution systems.•Assessment of multi-biomass supply chains and biomass to biofuel processing technologies.•Assessment of the key factors influencing the use of biomass and district heating in residential areas. The paper presents a mixed integer linear programming (MILP) approach to optimize multi-biomass and natural gas supply chain strategic design for heat and power generation in urban areas. The focus is on spatial and temporal allocation of biomass supply, storage, processing, transport and energy conversion (heat and CHP) to match the heat demand of residential end users. The main aim lies on the representation of the relationships between the biomass processing and biofuel energy conversion steps, and on the trade-offs between centralized district heating plants and local heat generation systems. After a description of state of the art and research trends in urban energy systems and bioenergy modelling, an application of the methodology to a generic case study is proposed. With the assumed techno-economic parameters, biomass based thermal energy generation results competitive with natural gas, while district heating network results the main option for urban areas with high thermal energy demand density. Potential further applications of this model are also described, together with main barriers for development of bioenergy routes for urban areas.