The Caithness Heat and Power project was launched by Highland Council in 2004 to provide heat and hot water to 500 homes in Wick from an innovative waste wood-fired system. But it ran into major problems and had to be taken back into council ownership four years later.
A highly critical report for the Accounts Commission in June 2010 revealed fundamental failings in the way the project was structured and managed.
A second report in February 2011 identified serious weaknesses in governance and accountability.
The Accounts Commission, whose latest report on the issue is published today, said it had been encouraged by the council's efforts to sort out the legacy of the project and reduce overall costs. Equipment and assets were sold to a private company which now provides services to more than 160 homes.
Accounts Commission chair Douglas Sinclair said: "Serious deficiencies in the governance of the project have led to significant loss of public money. Highland Council has learned an expensive lesson but there are lessons for all councils to learn from this project."
A Highland Council spokesman said: "The council has worked tirelessly to minimise the losses and to learn lessons to ensure that the failings are not repeated in any future venture of this nature."