How does AVR of electric generators work?

The function of the AVR is to automatically regulate the voltage of generators. As a load on a generator increases its terminal voltage tends to droop. The AVR senses the drop in terminal voltage by measuring the generator voltage and boosts up the excitation to the field of the generator to maintain the terminal voltage at the set level. Similarly as the load on the generator falls, the terminal voltage is maintained by the AVR by reducing the excitation to the field. The AVR also measures the Generator stator current. 
There are various types of AVR with lots of features/limiters like power factor limiter, stator capacitive current limiter, MVAR limiter etc. But basically, all function by controlling the excitation of the field of the generator based on the sensing of the Generator terminal voltage and stator currents.