PG::Error: ERROR: new encoding (UTF8) is incompatible

Ok, below steps resolved the problem:

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

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

2. Now we can drop it:

   DROP DATABASE template1;

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

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

4. Now modify template1 so it’s actually a template:

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

5. Now switch to template1 and VACUUM FREEZE the template:

   \c template1

   VACUUM FREEZE;

Problem should be resolved.