Generating Electricity

The way electricity is generated is by burning fuels to heat water. This creates the steam which spins the turbine (1). The turbine is connected to the generator, so when it spins, it turns the generator (2). The generator produces electricity which goes to the transformer where its voltage is increased before it travels down the power lines (3).

I know this diagram isn't the best in the world, but if you make something by yourself, you learn more.

Energy Transfers
Furnace: chemical energy into heat energy
Turbine: heat energy into kinetic energy
Generator: kinetic energy into electrical energy

Transformers
The step up transformers are used because they increase the voltage (not the current) before it travels down the line, so they reduce the heat loss and increase the efficiency. Then, it gets stepped down on the other end of the line.
If the current was increased even more heat energy would be lost.