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The effect of sensible heating of the phase‐change material (PCM) before melting and subcooling after solidification, on the performance of the latent heat storage system (LHSS), is studied in terms of first‐ and second‐law efficiencies for the overall charge–discharge cycle. The external heat transfer irreversibilities on account of the interaction between the heat transfer fluid and the storage element are characterized and the optimum phase‐change temperature for maximum second‐law efficiency is studied. The performance of the LHSS operation is assessed with and without sensible heating before melting and subcooling after solidification. It is observed that the optimum phase‐change temperature is higher, and, the overall second‐law efficiency is greater for LHSS with sensible heating and subcooling beyond a certain phase‐change temperature compared to latent heat storage alone. In addition, the first‐law overall efficiency is found to exhibit a minimum and a pre‐heated discharge stream is shown to result in a substantial improvement of the second‐law efficiency. © 1998 John Wiley & Sons, Ltd.