Utilizing solar energy for heat supply can reduce CO2 emissions and mitigate global climate change. In the Nordic region (e.g., Iceland and Finland), a tremendous seasonal mismatch exists between the availability of solar radiation and building heating demand. This paper proposes a local hybrid energy system based on solar energy for a residential district. It applies a borehole thermal energy storage to store solar energy in non-heating seasons, and uses stored energy for part of total heating demand in a residential neighbourhood in heating seasons. Photovoltaic panels are used to generate electricity for heat pump operation. To find out cost-optimal and ecofriendly solutions, the local energy system was first modelled and simulated in TRNSYS. Then, genetic algorithms were applied to optimize the system performance and costs. In optimal solutions, 38%-58% of total heating demand could be covered by on-site heat energy with the levelized cost of energy of 110–184 €/MWh. On this basis, importing additional electricity from grid to increase the utilization rate of air-to-water heat pumps can further increase the on-site heat energy fraction to 41%-88% with the levelized cost of energy of 108–201 €/MWh. Compared with the situation of fully district heating input, the proposed system can annually reduce CO2 emissions by 102–217 tons with the rate of 31–66%. Although the initial cost of the studied system is higher than that of district heating, the local hybrid energy system is worth further developing considering decentralizing heat energy production and reducing CO2 emissions.