The Small Hydro Power Plants allow to increase the energy amount from renewable sources, especially from small rivers in mountainous areas. This paper presents a new concept of a energy conversion system for application in a Small Hydropower Plant (SHP) which is based on a permanent magnet generator (PM generator) with a propeller turbine integrated with the generator rotor. The PM generator can work at a variable speed and therefore energy produced by the PM generator has to be converted by means of a power electronic unit to fit to the three-phase power grid parameters. For this concept, dimensions and parameters of the PM generator were specially designed on account of integration with water turbine. The paper precisely describes elements of energy conversion system and also presents the results of numerical tests for chosen working conditions. An original algorithm of control strategy for power electronic unit was used to adjust generated energy to the required parameters of the three-phase grid.