Handling sludge through thermal conversion is environmentally friendly, which, however, requires sludge drying. This work proposed to use the waste heat of flue gas (FG) to dry sludge. The integration of sludge drying in biomass fueled combined heat and power (CHP) plants can clearly affect the performance of downstream processes in FG cleaning, such as flue gas quench (FGQ) and flue gas condenser, and further affect the energy efficiency of CHP. In order to understand the influence, a mathematical model and an Aspen PLUS model were developed to simulate the drying process and the CHP, respectively. Based on simulations, it is found that the increase of feeding rate of sludge and the moisture content of sludge after drying can decrease the water evaporation in FGQ. An increase in the feeding rate of sludge in combination with a drop of moisture content of sludge after drying can decrease the heat recovery from FG. When using dried sludge to replace biomass, the amount of saving could be influenced by the moisture content after drying and the flow rate of sludge. Simulation results show that drying sludge to a moisture content of 40% leads to the maximum biomass saving.