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It reduces the torque of the engine. but it also reduces the steam consumption (and thus water and fuel consumption). When the initial acceleration is done, maximum torque is not needed anyway to maintain constant speed.
The torque needed will however vary with the electricity demand from the city. If the demand is higher, the resistance from the generator will also be higher (like climbing a hill with a steam loco), and so the torque needed to maintain speed will increase. The reverser can then be put more forward. Eventually, if full forward is not even enough, downshifting the gears will be needed.
For fuel efficiency, you'll want to push down on your accelerator pedal as little as possible (closest to "neutral") without losing speed. If you floor it, you'll use a lot more fuel.
If you end up having to climb a hill, (electricity demand in your city goes up) you will have to push down on the accelerator pedal a bit more to keep your speed up.