Following a strategic orientation towards sustainable development, the Government of the Republic of Croatia has changed its energy legislation and has put forward a framework for the systematic development and increased use of renewable energy sources and cogeneration. This paper focuses on changes in the regulatory context relevant to the cogeneration sector and also analyses the impact of energy market transition on cogeneration viability in municipal district heating, industry, services and the residential sector. Particular attention has been paid to the expected changes of heat, electricity and gas prices. We present a simple model for quantitative prediction of the cogeneration system profitability at different power levels under given national circumstances. Our findings support a need for a strong institutional support for initial penetration of the micro-cogeneration technologies into the Croatian energy system. (c) 2008 Elsevier Ltd. All rights reserved.