The decision comes after agency scientists carried out extensive investigations into the impact the site will have on the Pembrokeshire Marine Special Area of Conservation (SAC).
It found that, although there will be some changes in small areas around the power plant, the SAC as a whole would be protected. The assessments show that the site will comply with the relevant environmental legislation.
The investigation not only assessed the impact the discharge from the site would have on the area, but also took into account the impact of other local industry on the site.
The agency has insisted on tougher standards on matters which were raised during earlier consultation. These include measures to protect wildlife from the impact of discharges from the site and to shield local communities from noise.
The measures in the permit include: installing an acoustic barrier to reduce noise from the site, to address concerns raised by local residents; setting tight limits on emissions of nitrogen oxides to protect air quality and wildlife habitats; imposing a maximum temperature on the discharge to protect the habitat and wildlife of the Pembrokeshire Marine SAC; a condition that will see a net reduction in the amount of nutrients entering the marine environment to prevent growth of nuisance algae; an assurance that the plant is ready to utilise combined heat and power (CHP) should a viable outlet become available.
The permit can be issued after the Welsh Government told the Agency it could proceed with its decision.
Steve Brown, area manager for Environment Agency Wales, said: "This decision is the result of one of the most intensive assessments we have ever carried out in Wales. The Pembrokeshire Marine SAC is one of the most important and environmentally sensitive locations in Wales and must be protected by law.
"We also want to acknowledge the input we have had from local people and other organisations as part of our lengthy consultation. We have considered the views of the local community and organisations with an interest in this and responded to the points they made.
"In issuing this permit, we believe we have made sure that the local environment has been protected, but at the same time safeguarded energy security and the economic interests of the area."
The investigation included more than 21,000 separate assessments into the impact of the plant.
The agency's extensive consultation has included the Countryside Council for Wales (CCW), the Centre for Environment, Fisheries and Aquaculture Science (CEFAS), Pembrokeshire Coast National Park Authority, Pembrokeshire County Council, the Food Standards Agency, Milford Haven Port Authority, the Hywel Dda Health Board and Friends of the Earth Cymru.
'VITAL TO THE ECONOMY'
Commenting on the news that Pembroke Power Station has been granted a licence to operate by the Environment Agency, local MP Simon Hart said: "I am delighted that at long last this final hurdle has been cleared.
"Whilst it was important that the power station met all the environmental standards, any further delay would have started to impact on a project which is vital to the economy of the county."
However, Friends of the Earth Cymru believe the power station will have a "devastating impact on fragile and highly protected marine wildlife in Milford Haven."
They submitted a complaint to the European Commission in June last year over the handling of the case by the UK Government and the Environment Agency and say they are very disappointed that the Welsh Government has failed to protect Pembrokeshire's magnificent environment.
Gareth Clubb, Director of Friends of the Earth Cymru, said: "The Welsh Government might be satisfied that a few tweaks to the Environment Agency's paperwork is enough to rubber stamp a highly damaging power station that's now almost complete.
"But this plant is still going to have a devastating impact on one of Europe's most important wildlife sites, it's still going to be using second-rate technology, and it will still be throwing away energy equivalent to 40 per cent of Wales' electricity demand.
"Millions of fish and other marine life could be destroyed every year in Pembrokeshire. If we're ever going to take protecting our environment seriously, we need to make sure this kind of debacle does not happen again.
"Major energy companies should not be allowed to push ahead damaging projects and expect to get the permission once it's too late to stop - especially when the technology exists that means jobs and industry do not have to be at the cost of a healthy environment."