How was it discovered that water could produce electricity?

Answer 1

1. Water had been used for at least 3000 years to turn waterwheels to grind grain.
2. In the late 1700s waterwheels began to be used to provide power for the spinning machines and looms of textile plants.
3. With the development of electrical technologies and the generator in the 1800s it became obvious that waterwheels could power generators also and generate electricity.
4. Water turbines replaced waterwheels for turning generators as they were more efficient.

As you can see, it was not a discovery but a slow development and evolution of water power technology.