Born in Corpus Christi, Texas, Powell grew up in a military family and spent several of his childhood years in Italy, where his father was stationed with the U.S. Navy. After his father died of cancer in 1960, the Powells returned to the United States to settle in Jacksonville, Florida. In elementary school, Powell met Leon Wilkeson, who became a lifelong friend and the bassist for Lynyrd Skynyrd. Powell took an interest in piano and he began taking piano lessons from a local teacher named Madalyn Brown, who claimed that Billy did not need a teacher as he was a natural and picked things up well on his own. When it was time for high school, his mother enrolled Billy and his brother, Ricky, at Sanford Naval Academy in Sanford, Florida. Powell returned to Jacksonville, where he enrolled at Bishop Kenny High School. After graduation in 1970, he enrolled at and briefly attended a community college, majoring in music theory.
Around 1970, Powell found work as a roadie for Lynyrd Skynyrd and remained a member of the Skynyrd crew for two years, during which the band secured a support role for the band Mountain. In 1972, Skynyrd played a show at the Bolles School prom. During a break at that event, Powell sat down at a piano and launched into his piano-based version of "Free Bird". When the band realized their roadie's ability, he was offered the position of keyboardist.
In 1973, Lynyrd Skynyrd was signed to MCA Records and received national exposure following the release of their first album, (pronounced 'lĕh-'nérd 'skin-'nérd). The band's popularity soared in 1974 with their follow-up album, Second Helping, which featured their highest-charting single, "Sweet Home Alabama". The band enjoyed increasing popularity over the next three years, culminating in the 1977 release of Street Survivors.
Three days after the release of Street Survivors, Skynyrd's chartered Convair CV-240 crashed into a forest near McComb, Mississippi. The crash took the lives of singer Ronnie Van Zant, guitarist Steve Gaines, his sister and backing vocalist Cassie Gaines, assistant road manager Dean Kilpatrick, and both pilots. The remainder of the band suffered mild to severe injuries. Powell suffered severe facial lacerations, almost losing his nose, but was otherwise relatively uninjured. He was the first to be released from the hospital, and the only member able to attend the funerals of his fallen bandmates.
During the time between the plane crash and the Lynyrd Skynyrd reunion in 1987, Powell joined a Christian rock band, Vision, in 1984, recorded three albums (Mountain in The Sky, Vision, and Streetfighter), and toured extensively. His keyboard performances were spotlighted in Vision concerts. During the concerts, Powell spoke about his newfound Christianity; messages that were also delivered via two bonus tracks (Leon Wilkeson and Billy Powell) included on the album Mountain in The Sky.
Powell rejoined Lynyrd Skynyrd in 1987 for a tribute tour, and remained with the band until his death. Guitarist Gary Rossington is the only member from the classic lineup who continues to record and perform with the band.
In 2007, two years before his death, Powell played piano on Kid Rock's summer anthem All Summer Long.
On January 28, 2009, Powell died at the age of 56 at his home in Orange Park, Florida. The music he had recorded with Vision was played exclusively at a private memorial service, and Kid Rock sang a tribute. Many Southern Rock musicians were in attendance, including his Skynyrd and Vision bandmates, their families, Hank Williams Jr. and others. He was survived by his wife Ellen, sons Brandon and Joel, daughters Layla, Ashley, and Maggie, brother Rick, and sister Donna.
The song "Gifted Hands" was later written and recorded by Lynyrd Skynyrd as a tribute to Powell.