PostgreSQL: ERROR: new encoding (UTF8) is incompatible with the encoding of the template database (SQL_ASCII)

Error:

sqlalchemy.exc.DataError: (psycopg2.DataError) new encoding (UTF8) is incompatible with the encoding of the template database (SQL_ASCII)
HINT: Use the same encoding as in the template database, or use template0 as template.

[SQL: CREATE DATABASE hydra ENCODING 'utf8' TEMPLATE template1]
(Background on this error at: http://sqlalche.me/e/9h9h)

Solution:
First, we need to drop template1. Templates can’t be dropped, so we first modify it so it's an ordinary database:

UPDATE pg_database SET datistemplate = FALSE WHERE datname = 'template1';

Now we can drop it:

DROP DATABASE template1;

Now its time to create a database from template0, with a new default encoding:

CREATE DATABASE template1 WITH TEMPLATE = template0 ENCODING = 'UNICODE';

Now modify template1 so it’s actually a template:

UPDATE pg_database SET datistemplate = TRUE WHERE datname = 'template1';

Now switch to template1 and VACUUM FREEZE the template:

\c template1

VACUUM FREEZE;

The problem should be resolved now.