Abstract In this paper, the concept of exergy has been utilized in a cost accounting and economic analysis of a cogeneration plant producing electric power and desalinated water. To obtain an equitable cost allocation between electricity and water, cost balance equations have been written for each major plant component in terms of the known and unknown exergy costs of the different streams. The resulting set of linear simultaneous equations has been solved in association with two sets of auxiliary equations. Each set of auxiliary equations represents specific assumptions related to the exergy costs of the different streams. The results are presented as the cost of electricity and water versus the full cost for each set of auxiliary equations used. It was concluded that the use of exergy cost accounting is a convenient method for estimating the unit costs of electricity and water from cogenerating plants.