Island energy systems face significant challenges in delivering reliable and sustainable energy to remote and isolated regions, which often remain heavily reliant on costly and environmentally damaging diesel generators. To address such issues, this paper introduces a market-driven, multi-energy optimal dispatch framework for energy hubs (EHs), validated through real-time simulations. The framework is designed to optimize decentralized energy systems by enhancing economic efficiency, energy security, and decarbonization efforts. The proposed framework, formulated as a bi-level programming model, enables a typical EH at the upper level to strategically participate in a developed local energy market structured at the lower level. This approach minimizes the EH’s operational cost while ensuring operational flexibility and compliance with grid codes. To demonstrate the model’s efficiency and practicality, the real-world case of Kundur Island, Indonesia, is considered as a study site. The findings show that strategic bidding and consumer flexibility can significantly reduce the opration cost of the EH. Moreover, the real-time validation confirms the framework’s practical applicability in maintaining system resilience and adhering to regulatory requirements. Indeed, this study provides a scalable solution for decentralized energy markets, offering actionable insights for rural electrification, market design, and energy policy in geographically isolated regions.