A simulation model for the economic operation of a power system incorporating a reservoir-type hydro-electric plant is presented. An optimum dispatch, based on the Lagrange multipliers method, is used for an hour-by-hour loading of the thermal units. Hydro generation is assigned by means of an optimisation criterion which accounts for plant efficiency variation with output, yielding a realistic and accurate representation of hydro plant operation. Because the expressions involved in the optimisation procedure are explicit, the simulation is highly efficient as well as accurate and is particularly suitable for long range forecasting and parametric studies. A program based on the simulation was used to assist in the optimisation of a proposed hydro-electric plant in Israel. The operating cost of the thermal/hydro power system was evaluated for one-week periods representing different seasons of the year. The results were used to determine the optimal design parameters of the new plant: the generating capacity, number of units and reservoir volume.