The ‘local electricity market’ (LEM), which adopts a decentralised way of organising energy transactions, is considered a promising way of further engaging consumers in the low-carbon energy transition. Yet, so far, few studies have delved into the legal issues of applying this new market setting. This article examines the legal challenges of developing LEMs in the EU electricity law context, taking operating such markets within energy communities as an example. The legal analysis is built upon key characteristics of LEMs summarised from the economic, technical and policy literature on LEM market frameworks and pilot projects across the EU. It sheds light on novel legal challenges that must be considered when harnessing this new market layer to facilitate energy transfers or sharing within energy communities. Based on the identified legal issues, this research provides recommendations for the design of LEMs and the legislation governing local market activities.