Biomass-fired cogeneration not only is an environmentally friendly energy production, but also possesses high energy conversion efficiency. Generally, the wood product industry requires both heat and electricity. Combined heat and power generation cogeneration) using wood residue has a three-fold benefit: waste minimization, reduction of an energy-related production cost and additional income from selling the excess electricity to the utility. In reality, the process heat demand fluctuates according to the production activities in the factory. The fluctuation of process heat demand affects the cogeneration efficiency and the electricity output and, consequently, the financial return, since the prices of heat and electricity are different. A study by computer simulation to establish a guideline for optimum operation of a process heat fluctuating cogeneration power plant is presented. The power plant was designed for a sawmill and an adjacent plywood factory using wood wastes from these two processes. The maximum boiler thermal load is 81.9 MW while the electricity output is in the range 19-24 MW and the process heat 10-30 MW. Two modes of operation were studies, namely the full (boiler) load and the partial (boiler) load. In the full load operation, the power plant is operated at a maximum boiler thermal load, while the extracted steam is varied to meet the steam demand of the wood-drying kilns and the plywood production. The partial load operation was designed for the partially fuelled boiler to provide sufficient steam for the process and to generate electricity at a desired capacity ranging from the firmed contract of 19 MW to the turbine maximum capacity of 24 MW. It was found that the steam for process heat has an allowable extracting range, which is limited by the low pressure feed water heater. The optimum operation for both full and partial load occurs at the lower limit of the extracting steam. A guideline for optimum operation at various combinations of electricity output and steam demand is presented. The maximum achievable overall efficiency is 64.6 per cent when the power plant is operated at partial (boiler) load condition for 19 MW electricity and 30 MW process heat. The full load operation, although having lower overall efficiency, is preferable financially because of the higher unit price of electricity in comparison with heat.