So, how do you use .PSD files to create usable sprites?
There are two methods... one is to use a program to create composite sprites (Gimp 2 is a free program) to select individual layer combinations and export images as .png or .webp files. I suggest only doing the expressions and combinations you intend to use to save space, and make sure to name them in the proper format... check the Renpy Images Tutorial section on sprites (look for the section on Eileen) Pro tip: Make sure not to export the background layer or else you will end up with a white box around your character.
The second method is considered best practice to create a smaller game file, using layered sprites where each element stacks on top of each other. It requires additional coding and may be daunting for beginners, but if you're interested, HERE is a tutorial by GruntSteel with additional information.