A model-based performance monitoring method for heat utilization processes in distributed energy systems is developed in this study. It is characterized by introducing dynamic compensation, where the response lags of heat exchangers to variations in their operating conditions are identified as first-order lag elements, and the output process variables estimated using a static input-output model are revised on the basis of these identified response lags. The estimated values of the output process variables are compared with their measured values in order to detect device failures. A numerical simulation of a heat utilization process in a gas engine cogeneration system containing a radiator with a considerable response lag reveals that the developed performance monitoring method has sufficient estimation accuracy in terms of the output process variables and ability to detect device failures, including a deterioration in the heat transfer performance of the radiator and heat exchanger, in a dynamic state.