Excess heat from a kraft pulp mill can be used either internally to increase the level of efficiency in the mill, or externally for example as district heating. This paper presents an approach to investigate the competition between external and internal use through modelling the pulp mill and an energy company (ECO) within the same system boundary. Three different sizes of ECOs with different district heating demands are studied. To investigate the competitiveness of using industrial excess heat as district heating compared with other heat production techniques, the option of investing in excess heat use is introduced, along with the possibility for the ECO to invest in biomass combined heat and power (CHP), waste CHP and natural gas combined cycle (NGCC). To evaluate the robustness of the model, alternative solutions are identified and will be used as a comparison to the optimal solutions. The model has been verified by comparing the results with previous studies concerning kraft pulp mills and with related studies regarding district heating and real ECOs. Finally, the approach presented in this part of the study will be used in the second part in order to investigate the trade-off between internal and external use of excess heat under different future energy market scenarios. (C) 2008 Elsevier Ltd. All rights reserved.