The development towards more energy efficient buildings, as well as the expansion of district heating (DH) networks, is generally considered to reduce environmental impact. But the combined effect of these two progressions is more controversial. A reduced heat demand (HD) due to higher energy efficiency in buildings might hamper co-production of electricity and DH. In Sweden, co-produced electricity is normally considered to displace electricity from less efficient European condensing power plants. In this study, a potential HD reduction due to energy efficiency measures in the existing building stock in the Swedish city Linkoping is calculated. The impact of HD reduction on heat and electricity production in the Linkoping DH system is investigated by using the energy system optimisation model MODEST. Energy efficiency measures in buildings reduce seasonal HD variations. Model results show that HD reductions primarily decrease heat-only production. The electricity-to-heat output ratio for the system is increased for HD reductions up to 30%. Local and global CO2 emissions are reduced. If co-produced electricity replaces electricity from coal-fired condensing power plants, a 20% HD reduction is optimal for decreasing global CO2 emissions in the analysed DH system. (C) 2011 Elsevier Ltd. All rights reserved.