In this paper the marginal costs of combined heat and power (CHP) for district heating or industrial use in a local area or an urban region are discussed. A set of technical and economic parameters are presented that describes the individual generating unit as well as the electricity supply system. The competition between the cogenerated electricity and electricity supplied through the national or international grid is analysed in view of the "common carrier" concept and the proposal for an internal energy market for the European Community. The analysis is illustrated with examples from existing and proposed CHP applications from Belgium and Denmark.