Abstract: To break monopoly, improve rural market efficiency and curb market power abuse are the fundamental direction of electricity reform. Based on non-cooperative game theory, a Cournot model with bilateral financial options is developed. Some IPPs and a grid company are in the game of two-period in options and spot markets. They sign a bilateral options contract in the options market in the first instance and make a decision to sell the optional options quantity; and then the IPPs compete in spot market, make a decision to choice they power output to their maximum expected benefit in the event that the options which they hold and sell have been known. The model can be solved by backward induction method, and the influences of different parameters in the model to the market equilibrium are analyzed. By comparing with existing models, the results show that the model with bilateral financial options has stronger effect on power market and it can improve social welfare greatly from the theoretical studies and numerical simulation analysis. It provides a new idea to guide the competition orderly and effectively for regulators.