Abstract: In the case of combined peak shaving by hydro and thermal power, there are some problems in the calculation of electric power and energy balance based on the principle of minimum electricity loss caused by abandoned water, without considering the economic operation mode of thermal power station. From the view of power system economic operation, this paper takes sum of the cost of coal consumption of thermal power station and the opportunity cost of electricity loss caused by abandoned water as the total cost of the power system, and establishes the optimization model of electric power and energy balance with the minimum total cost. In terms of the algorithm, considering the difficulties of unit combination optimization and economic load distribution, the double nested optimization algorithm is adopted. The outer layer adopts enumeration method for unit combination traversal optimization, and the inner layer adopts equal incremental rate method to calculate the minimum cost of coal consumption. A typical daily power balance calculation of a regional power grid in Yunnan Province is taken as an example, the peak shaving operation process of hydro and thermal power is calculated according to the minimum total cost model and the minimum electricity loss caused by abandoned water model respectively. The calculation results show that although the opportunity loss of electricity loss caused by abandoned water of the former is greater than the latter, the operation cost of thermal power is far less than the latter, so the total cost is also less than the latter.