This investigation involves recent work on developing membrane distillation (MD) as a novel separation technology for flue gas condensate treatment in combined heat and power (CHP) applications. Flue gas condensate samples were obtained from municipal solid waste and bio-fuel fired CHP facilities and were tested in laboratory-scale air gap MD equipment. Separation efficiencies and other water quality parameters were measured, and the outcomes show that high-quality clean condensate can be recovered, i.e., conductivity <5 mS/m; total organic carbon <2 ppm; total hardness <0.15 °dH; pH ∼7.5; and turbidity <1 FNU. Strict discharge limits for cadmium could not be achieved in all trials. This aspect is examined in further detail with respect to potential mechanisms attributed to the non-ideal separation of contaminants below the parts per billion limit. Beyond this, an industrial scale district heating driven membrane distillation system was designed and analyzed. The estimated annual thermal energy demand was 88 GWh for treating 500,000 m3 of flue gas condensate per year, with an expected clean condensate cost of around 2.6 $/m3.