A combined heat and power (CHP), sometimes called as cogeneration, is generally independently installed into buildings without networked to the power grid, but unbalanced heat/electricity ratio of the CHP output and the demand significantly limits CHP’s performance. This study investigates the effect of the networked CHP system to the power grid on CO₂ reduction and cost. The networking concept of CHPs is that CHPs are installed to buildings with large heat demand, and excessive electricity is consumed in buildings in the network via power grid. The analysis was applied for a model area in Sapporo, which is an urban residential area covered by electric feeders from a distributing power substation. The results show that the networked CHP system can reduce CO₂ significantly compared to the non-networked system with the same cost. This is due to the fact that CHPs can be operated for the heat demand without limited by the electricity demand of the building by the networking, and their capacities of the system can be utilized effectively. Therefore, the maximum CO₂ reduction extent is also increased. These results indicate the significance of the networking concept. Sensitivity analysis of the results for the unit costs and CO₂ emission factors of the grid power was also made, and the networking effect was confirmed for various conditions. The paper also investigates the suitable type of CHPs installed to households, showing that fuel cell can reduce larger amount of CO₂ than gas engine with the networking condition.