The on-line performance monitoring of a shell-and-tube type heat exchanger using water and steam, which is one of the key components of distributed energy supply systems, has been developed on the basis of a theoretical model. By using a steady-state model of the heat exchanger, this performance monitoring first estimates output process variables and heat exchange performance of the heat exchanger in response to the variation in measured input process variables. These estimated values are then compared with the measured ones for the on-line performance monitoring. Its effectiveness has been confirmed by the demonstration experiments conducted not only in the steady and transient states but also under the condition of air accumulation in the shell as one of the common failures of this type of heat exchanger. The results confirm the sufficiency of the estimation accuracy of the output process variables and heat exchange performance in a wider operating range and the detection capability of the deterioration of the heat exchange performance due to the air accumulation in a short period.