Increasing energy demands, predicted fossil fuels shortage in the near future, and environmental concerns due to the production of greenhouse gas carbon dioxide on their combustion have motivated the search for alternative ‘clean’ energy sources. Among many resources for this, microalgae have been found to be most promising due to their high production capacity of vegetable oils. They possess a high growth rate, need abundantly available solar light and CO₂, and thus are more photosynthetically efficient than oil crops. Also, they tolerate high concentration of salts allowing the use of any type of water for the agriculture and the possibility of production using innovative compact photobioreactors. In addition, microalgae are a potential source of biomass, which may have great biodiversity and consequent variability in their biochemical composition. This paper presents an overview on microalgae with particular emphasis as a source for energy (biofuel/electricity) and new materials. Critical issues involved in production of microalgae and their use, future R & D to overcome these, including the work initiated by the authors at Federal University of Paraná, UFPR, in Brazil are discussed. Copyright © 2010 John Wiley & Sons, Ltd.