This paper presents a simulation analysis with System Dynamics of the possible diffusion of micro-systems for combined heat-power generation (mu-CHP) as a substitute for centralised electricity generation and local boilers in the residential sector. Decentralised energy production is an important challenge in the 21st century to respond to the threats of exhaustion of non-renewable resources, and of global pollution. The purpose of the System Dynamics modelling is to show the difficulties mu-CHP faces, like most innovative technologies, mainly due to its high investment costs. Feedbacks are important in modelling the diffusion process of this technology and the fundamental aspect of learning effects on the cost decrease. The consumer model is based on the replacement of traditional boilers by mu-CHP installations using the Bass diffusion model. It is shown that natural economic forces are probably not sufficient to achieve a sustained growth. Several incentive schemes to be implemented by the regulatory authorities are investigated to promote this technology. (C) 2008 Elsevier Ltd. All rights reserved.