Thermodynamics plays an important role to perform the energy and exergy analyses of the industrial processes. The first law is widely used in engineering practice and is the basis of the heat-balance method of analysis that is commonly used in energy systems performance analysis. However, the second law involves the reversibility or irreversibility of processes and is a very important aspect in the exergy method of energy systems analysis. From the viewpoints of energy conservation and environmental benefits, cogeneration system can be considered as one of sustainable energies. The exergy analysis allows for improvements not necessarily attainable via energy methods, like increased efficiency, reduced fuel use, and reduced environmental emissions. From this point of view, in this study, exergy analysis of an actual Diesel engine-based cogeneration plant with a total capacity of 11.52 MW electrical powers, 9 t h (-1) of steam and 140 t h (-1) of hot water is carried out by analyzing the components of the system separately. The results show that 39.86% of the exergy entering the plant is converted to electrical power. The net steam production of the plant constitutes 8% of the total exergy input and the hot water production of the plant constitutes only 1.26% of the total exergy input. The remaining 50.88% of the exergy input is lost. Total exergy destruction in the engine is mostly due to the highly irreversible combustion process in the engine, heat losses from engine and friction. Small improvements in engine design and operation can provide better utilization of plant performance compared to large and expensive improvements in other components. Copyright (C) 2010 John Wiley & Sons, Ltd.