MODEST, an energy-system optimisation model is described. It has been applied to a typical local Swedish electricity and district-heating utility and to the national power system. Present and potential installations and energy hows should be considered and their best combination can be obtained through optimisation. MODEST uses linear programming to minimise the capital and operation costs of energy supply and demand-side management. Seasonal, weekly, and diurnal variations of, for example, demand, costs, and capacities are considered. MODEST may be used to decide which investments to make, the dimensioning of new installations, and the operation of all system components. The municipal utility under study should now expand its heat production using woodchips. Electricity export or nuclear phase-out wilt probably raise the Swedish electricity prices. In this case, cost minimisation is achieved by introducing combined heat and power (CHP) production in the municipality. Fossil fuels should be used in the cogeneration plant at current taxation levels but biofuels are favourable if higher environmental fees are imposed for CO2 emissions. Biomass capacity expansion could decrease local CO2 emissions by 80%. Efficiency improvements for electricity use have robust profitability at high electricity prices. The Swedish electricity demand may be satisfied without nuclear power and fossil fuels through massive biomass use, wind-power supply, and energy conservation.