Abstract
This paper considers optimal pricing of cogenerated electricity and heat used for district heating in local communities. The analysis shows that the price structure given on the national market for high-voltage power will in most cases be reflected in the optimal price structure on the local market for electricity, i.e. one price in peak periods and lower prices in off-peak periods. Another result of great practical interest is that in some cases the optimal price structure on the district- heating market will be the reverse. The existing price structures do not conform to these findings. The short-run welfare gains of switching to optimal prices in a stylized local community are measured and found to be substantial.
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