In many municipalities, there are district heating networks, which are quite commonly supplied by combined heat and power plants (CHP). A district heating network contains buildings of different types. In this paper, one such municipal energy system is analysed. In order to provide space heating and domestic hot water, investments could be made on the supply side in power plants, or on the demand side in he buildings, for example in the form of extra wall insulation. The electricity from the CHP plants is supplied to the municipality but can also be sold to the electricity market, and electricity can, of course, also be bought from the market. The variation in price on the spot market over any given day is significant. The need for district heat in the building stock also varies, for example due to climatic conditions. The energy system in the case study is analysed with a mixed integer linear programming model. The model has 3 h time steps in order to reflect diurnal variations, and an entire year is analysed. A case study is presented for the city of Linkoping in Sweden. Oil the demand side, the options are: extra wall insulation, extra attic insulation and better types of windows. The building stock is divided into nine categories. (C) 2003 Elsevier Ltd. All rights reserved.