Liberalisation of the electricity market and governmental politics influence heat and power supply in Sweden, like in many other countries. In this paper, the impact of subsidies and fuel and electricity costs on a representative Swedish district heating system is analysed. The energy system model MODEST (model for optimisation of dynamic energy systems with time dependent components and boundary conditions) was used to optimise investments and operation for heat and power production plants. At higher electricity prices, combined heat and power introduction may be profitable in the studied system. With current fuel prices, a natural gas fired combined cycle would primarily be favourable. A lower woodchips price and a governmental grant would make cogeneration with a biomass fired steam cycle more beneficial.