The performance of residential micro combined heat and power (micro-CHP)-a technology to provide heat and some electricity to individual dwellings-is generally dependent on the magnitude of household thermal energy demand. Dwellings with larger and more consistent thermal consumption perform well economically and achieve greater greenhouse gas emissions savings. Consequently, the performance of micro-CHP is dependent on the level of thermal insulation in a dwelling. Therefore, emerging policy approaches regarding energy use in the residential sector, which generally support both energy efficiency measures such as thermal insulation and adoption of micro-CHP, may inadvertently incentivise micro-CHP installation where CO2 reductions are meagre or not cost-effective. This article examines this issue in terms of the changes in economic and environmental performance that occur for three micro-CHP technologies under changing patterns of residential thermal insulation in the United Kingdom. The results of this analysis are used to comment oil the structure of policy instruments that support micro-CHP. It is found that simultaneous support for energy efficiency measures and micro-CHP can be justified, but care must be taken to ensure that the heat-to-power ratio and capacity of the micro-CHP system are appropriate for the expected thermal demand of the target dwelling. (C) 2008 Elsevier Ltd. All rights reserved.