Moisture and its variation in wood chips make the control of burning in small scale heating appliances difficult resulting in emissions and loss of efficiency. If the quality of wood chips would be better, i. e. dried and sieved fuel with more uniform size distribution would be avail able, the burning could be much cleaner and efficiency higher. In addition higher power out put could be obtained and the investment costs of the burning appliances would be lower. The production of sieved and dried wood chip with good quality could be accomplished in connection with a district heating plant. Then the plant would make profit, in addition to the district heat, from the dried wood chips sold to the neighboring buildings and enterprises sep a rated from the district heating net using wood chips in energy production. The peak power of a district heating plant is required only a short time during the coldest days of the winter. Then the excess capacity during the milder days can be used as heat source for drying of wood chips to be marketed. Then wood chips are sieved and the fuel with best quality is sold and the reject is used as fuel in the plant it self. In a larger district heating plant, quality of the fuel does not need to be so high In this paper the effect of moisture on the fuel chain and on the boiler is discussed. Energy and mass balance calculations as a tool of system design is described and the characteristics of proposed dry chips production method is discussed.