A novel optimal operation scheme for a small cogeneration system that is promoted from an emergency standby system is introduced. Time-of-Use (TOU) tariff and various operational constrains are taken into account when evaluating the electricity cost and peak demand reductions. Based on a two-stage methodology and a modified mixed-integer programming technique, a novel algorithm is developed to solve the nonlinear optimization problem. A hospital is selected as a sample to demonstrate the correctness of the proposed algorithm. A 100kW gas engine standby generator is promoted to a sample cogenerator system by adding a 50RT absorption chiller and other necessary accessories. Optimal operation scheme, operation benefits and payback period on investment of this sample cogenerator system are analyzed. The simulation results indicate that promoting a emergency standby generator to a cogenerator system is profitable and should be encouraged.