Thermal services in buildings significantly contribute to green-house gas emissions worldwide. This put them at the focal point of several policies and measures aimed at decarbonization. As the efficiency-first principle suggests, building insulation is a critical measure for decarbonizing the sector. However, recent evidence from Italy indicates that renovation rates remain low, even with substantial subsidies. To address this, it is crucial to consider both demand-side efficiency and supply-side solutions in the sector’s decarbonization. We developed and used a detailed optimization model that provides the least-cost pathway for the transition of Italy’s building sector over the coming decades. The model is highly granular, with more than 400 zones that take into account the different temperatures and geographical peculiarities. It is also technologically comprehensive, assessing a range of supply-side technologies alongside insulation strategies. The results of the model highlight the importance of building insulation, suggesting an average annual retrofit rate of 2.2%. District heating and electrification are key as well, though gas boilers keep being important in the transition phase. Retrofit rates do not significantly influence the optimal mix; hybrid heat pumps however show a much higher penetration in the presence of slow renovation.