Abstract: An approach of operation optimization for island power grid utilizing VSC-HVDC is presented in this paper, which makes use of the ability of VSC to actively regulate active and reactive power. Reducing active power loss as well as optimizing the economic costs due to capacitor bank switching is considered as the optimization goal. In accordance with the characteristics of this model, an improved genetic algorithm is proposed. Based on a real project - Multi-terminal VSC-HVDC Demonstration Project in Zhoushan, the effects of the proposed approach is demonstrated.