The decision whether or not to install small cogeneration for residential purposes mainly depends on individual economic considerations, combined with ecological awareness. Since in most cases, the economic balance is still unfavourable, government grants are considered in order to bridge this economic barrier. It is however still unclear how these grants are best spent to obtain an optimal environmental benefit. In the case of cogeneration, mainly static and simplified methods are used, completely neglecting the dynamic interaction between the cogeneration systems and the central power system and the dynamic response of the cogeneration units themselves. In this paper, these issues are discussed in two parts. The first part clarifies how an actual cogeneration unit, if necessary in combination with a back-up boiler and heat storage, will respond to a certain demand. For this purpose, experiments were performed to establish the transient and stationary behaviour of the system. It is shown that the transient heating of the cogeneration engine is rather slow (e.g. half an hour after cold start, the engine only produced 65% of the heat it would have in stationary regime) where the electric transient behaviour is negligible. In the second part of the paper, dynamic simulations are performed to quantify the impact (primary energy saving and reduction in greenhouse-gas emissions) of the massive installation of cogeneration for residential heating. Two important parameters are isolated. First, the interaction with the expansion of the central power system is very important. If the installation of cogeneration prevents the commissioning of new power plants, the potential energy saving and (especially) emission reduction are reduced. The second parameter is the annual use of the cogeneration units. Here, the potential energy saving and emission reduction increase with increasing annual use. Copyright (C) 2002 John Wiley Sons, Ltd.