Kepco was planning to extract 120 million tonnes of coal over 25 years at the proposed Bylong mine, which would have created 650 jobs during construction and 450 during production.
The IPC said it was not in the public interest as it was contrary to the principles of "ecologically sustainable development".
"While the commission found the mine's predicted air quality, biodiversity, noise, subsidence and visual impacts are acceptable and/or can be effectively managed or mitigated, it raised significant concern about other longer-lasting environmental impacts," the commission said in its determination," it said.
"The predicted economic benefits would accrue to the present generation but the long-term environmental, heritage and agricultural costs will be borne by the future generations."
It also found that the groundwater impacts would be unacceptable and greenhouse gas aspects of the project remained problematic.
The refusal by the IPC to approve the Kepco Bylong project represents everything that is wrong with the NSW planning system, according to NSW Minerals Council CEO Stephen Galilee.
"This refusal is a massive lost opportunity for the local region and in particular the communities of Kandos and Rylstone where the economic injection from the jobs and investment associated with the project are desperately needed," he said.
"This refusal comes after more than seven years of assessment, including repeated changes to the assessment processes and requirements during this period, highlighting just how difficult and complicated the current NSW planning system has become."
Despite support from the local community, local MPs, local council, local businesses, and the Department of Planning Infrastructure and Environment which assessed that the project was approvable with conditions, the project has been refused by the delegated authority of the IPC, acting on behalf of the NSW government.
"The role of the IPC demonstrates how the NSW Government has allowed the economic future of regional NSW, and regional communities like Kandos and Rylstone, to be left at the mercy of an unelected and unaccountable body, with no legal obligation to abide by any of the policies of the elected government of the day," Galilee said.
The NSW Government must now acknowledge that the planning system it has created in this state is a major threat to the NSW economy, and take action to ensure NSW is open for business, or more jobs and investment will be lost."
Lock the Gate Alliance spokesperson Georgina Woods said the decision shows NSW is getting its priorities right, safeguarding strategic farmland and water resources from destruction and depletion for coal mining.
"We warmly congratulate the NSW Government on allowing this independent process to proceed to protect our precious land and water for the long-term," she said.
"The Bylong Valley is a very special place, not just for the farmers that produce wool, beef, and fodder there, but for people around the state that recognise its extraordinary beauty and rich cultural and natural heritage.
"In a week when school children are preparing to strike from school for their future, we warmly welcome the Independent Planning Commission's recognition that this coal mine would be contrary to the principle of intergenerational equity.
"It was the wrong place for a coal mine, and this is the wrong time for NSW to be opening up new areas for coal exploitation as the world shifts away from coal in a bid to halt global warming."
Bylong Valley landholder and sheep farmer Phill Kennedy said: "We're over the moon that the Commission has made the right decision. This valley is hugely productive and stunningly beautiful.
"Thanks to this sensible decision, It's going to keep producing food and wool for New South Wales for a long time to come.
"The productivity of the valley will also greatly increase when properties come back into private hands again, rather than those of Kepco."
Warwick Pearse from Bylong Valley Protection Alliance said: "We applaud the IPC - this is a wonderful decision. Bylong Valley will be safe from mining, and continue to be the productive and beautiful valley it has been for many years.
"It underlines the need to actually give legal protection for prime agricultural land. This farmland should never have been put at risk in the first place."