The possibility of improvement of the energy performance and economic feasibility of a CHP plant by the use of hot water storage tank is analysed in the paper. An energy balance of a system consisting of a CHP module, a peak boiler and a heat storage unit has been built and the storage efficiency has been defined. Heat transfer in storage tanks and its influence on the energy balance is discussed. A numerical model of heat transfer in the storage tank is presented. The thermodynamic and economic optimum of the tank volume for a sample co-generation plant has been found. It has been eventually proved that the installation of a heat storage unit provides reduction of fuel consumption in the system. Copyright (C) 2004 John Wiley Sons, Ltd.