In the hybrid power system (HPS), taking battery capacity fading characteristics and demand management strategy (DMS) into consideration, an operational optimization method is developed in this work. From the energy utilization and economic perspectives, the minimum total renewable energy curtailment rate (TCR), minimum total outsourced electricity (TOE) from the grid and minimum total operating cost (TOC) are respectively taken as the optimization objectives. The corresponding mathematical models of the proposed method are established, which feature mixed integer nonlinear programming (MINLP) ones. A case study of a solar-wind-biomass-battery HPS is adopted to verify and illustrate the application and effectiveness of this proposed method. Results show that the optimal operating schemes and the DMSs of the HPS based on battery capacity fading characteristics can be determined by minimizing the TCR, TOE and TOC. The target values of TOE and TOC of the HPS with adopting DMS are 15,995.3 kWh and 18,112.1 $, which are about 70 % these of the HPS without DMS. Furthermore, the relationships between battery capacity fading characteristics and DMS are comprehensively investigated in this operational optimization of the HPS. Finally, the effects of different battery types, outsourced electricity price changes on the operation of the HPS are analyzed and discussed. This work provides a valuable method for the operational optimization of the HPS.