Deploying shunt capacitor banks in distribution systems can effectively reduce the power loss and provide additional benefits for system operation. In practice, the power loss on distribution transformers can account for a considerable portion of the overall loss. This paper proposes a method for optimal placement of capacitor banks to the distribution transformers to reduce power loss. The capacitor bank locations are considered at the low-side of transformers. The net present value (NPV) criterion is adopted to evaluate the cost benefit of the capacitor installation project. First, an explicit formula for directly calculating the power loss of radial distribution systems is derived. Then, the optimal capacitor bank placement is formulated as a mixed-integer programming (MIP) model maximizing the NPV of the project subject to certain constraints. The model is suitable for being solved by commercial MIP packages, and the operational control of the capacitor banks to maximize the power loss reduction can be simply achieved by local automatic switching according to VAR measurements. The proposed method has been practically applied in the Macau distribution system, and the simulation results show that the proposed method is computationally efficient, and a considerable positive NPV can be obtained from the optimal capacitor bank placement. © 2013 IEEE.