In this paper the energetic and economic performance assessment of residential application of IC engine based cogeneration system in the Serbian climatic conditions using building energy simulation software was performed. The performance of IC based system was compared with the performance of the two other conventional systems for DHW preparation: gas and electric water heater. Comparing the IC based system with gas water heater the period required to return investment costs of IC engine is relatively high (11.7 years). The main barriers for widespread residential application of IC engine cogeneration system are related to the high capital costs and low price of purchased or sold electricity. In this respect, the investment cost reduction in small scale cogeneration systems has to be achieved. In relation to the current price in Serbia the price of purchased and sold electricity (feed-in tariff) should be increased by 37.5% and 67.5%, respectively, in order to achieve the value of payback period of five years. Comparing the IC based system with electric water heater the application of the IC engine is economically feasible since the payback period amounts 3.42 years. According to the simulation results, the IC engine cogeneration system ensured a primary energy saving of 28.81%.