The liberalization of power markets has entailed dramatic changes in power system planning worldwide. The inception of new alternative technologies, smart grids and distributed generation and storage is expected to make system planning even more challenging. Government policies still play a major role in the evolution of a country's power generation mix, even in those countries with liberalized markets. This paper presents a System Dynamics model aimed at assessing the overall technical, economic and environmental impact of renewable energy incentives and capacity payment policies. The model has been used to simulate Spain's power industry in order to assess the impact of electric power policies with the goal of getting insights regarding how to achieve an optimum power generation mix. The main conclusions of the present paper are (i) the necessity of specific regulatory actions in Spain in order to keep adequate reliability levels, avoid price spikes and boom and bust investment cycles as well as to deploy specific technologies, (ii) the fact that capacity payments are a better instrument for keeping adequate reserve margins and avoiding power price spikes than renewable energy incentives and (iii) the evidence that both instruments entail additional system costs over the base case scenario.