Thymic T cell development and T cell receptor repertoire selection are dependent on essential molecular cues provided by thymic epithelial cells (TEC). TEC development and function are regulated by their epigenetic landscape, in which the repressive H3K27me3 epigenetic marks are catalyzed by polycomb repressive complex 2 (PRC2). Here we show that a TEC-targeted deficiency of PRC2 function results in a hypoplastic thymus with reduced ability to express antigens and select a normal repertoire of T cells. The absence of PRC2 activity reveals a transcriptomically distinct medullary TEC lineage that incompletely off-sets the shortage of canonically-derived medullary TEC whereas cortical TEC numbers remain unchanged. This alternative TEC development is associated with the generation of reduced TCR diversity. Hence, normal PRC2 activity and placement of H3K27me3 marks are required for TEC lineage differentiation and function and, in their absence, the thymus is unable to compensate for the loss of a normal TEC scaffold.