ABSTRACT. Anomaly detection is critical in industrial systems such as smart grid systems to guarantee their safe and effective operation. The smart grid stations contain sensitive data, and they are concerned about sharing it with a third-party server to establish a centralized anomaly detection system. Federated Learning (FL) is a feasible solution to these problems for enhancing anomaly detection in smart grid systems. This study describes a method for developing an unsupervised anomaly detection based on FL system using a synthetic dataset based on real-world grid system behavior. The paper investigates the usage of FL’s long short-term memory autoencoder (LSTM-AE) for anomaly detection. For more accurate identification, this research explores the performance of integrating LSTM-AE with one-class support vector machine (OC-SVM) and isolation forest (IF) and compares their results with a threshold-based anomaly detection approach. Moreover, an approach is described for generating synthetic anomalies with different levels of difficulty to evaluate the robustness of the anomaly detection FL model. The FL models results are compared with the centralized version of the models as a baseline and the results show that FL models outperformed the centralized approach by detecting higher outlier data by achieving 99% F1-Score.