Contract capacity setting for industrial consumer with self-owned generating units (SOGUs) is a highly discrete and nonlinear optimization problem considering expenditure on the electricity from the utility and operation costs of the SOGUs. This paper proposes an improved Taguchi method that combines existing Taguchi method and particle swarm optimization (PSO) algorithm to solve this problem. Taguchi method provides fast converging characteristics in searching the optimal solution through quality analysis in orthogonal matrices. The integrated PSO algorithm generates new solutions in the orthogonal matrices based on the searching experiences during the evolution process to further improve the quality of solution. To verify feasibility of the proposed method, the paper uses the real data obtained from a large optoelectronics factory in Taiwan. In comparison with the existing optimization methods, the proposed improved Taguchi method has superior performance as revealed in the numerical results in terms of the convergence process and the quality of solution obtained. (C) 2011 Elsevier Ltd. All rights reserved.