A method for optimizing reactive power generation of an electrical power system includes generating, via a plurality of cluster-level controllers, a cluster-level reactive power command for each cluster of electrical power subsystems based on a system-level reactive power command. The method also includes determining, via the cluster-level controllers, a subsystem-level reactive power command for each of the electrical power subsystems based on the cluster-level reactive power command. Further, the method includes evaluating, via a plurality of subsystem-level controllers, reactive power capability of a plurality of reactive power sources within each of the electrical power subsystems. Moreover, the method includes generating, via each of the subsystem-level controllers, an actual reactive power for each of the electrical power subsystems based on the evaluation by allocating a portion of the subsystem-level reactive power command to each of the plurality of reactive power sources.