Due to the huge thermal mass of buildings and the district heating (DH) network, room temperatures in buildings do not change much when the heat output from the heat source varies significantly during the day. Therefore, a combined heating and power (CHP) plant can vary its power output during the day to match the load variation of the electrical utility grid which will change the heat output but have Little effect on the quality of space heating. So, a CHP Plant for space heating can act optimally as a peak load regulating plant. This paper studies the optimal operation of a CHP plant used as a peak load regulating plant. The system for study consists of a DH network, an electrical utility grid and a CHP plant in which only an extraction unit is considered for simplicity. The thermodynamic characteristics of the heated buildings and the DH network are used to develop the dynamic relationships between the CHP plant heat output and the building room temperatures. The concept of electricity value equivalent is introduced to evaluate of the generated electricity for each interval of the day. An optimal operation model is built with two objectives: that the customers＇ space heating requirements are met and that the CHP plant profit is maximized. Then, a new algorithm is proposed for the model and numerical results are presented for a specific case. (C) 2000 Elsevier Science Ltd. All rights reserved.