The need for alternative energy sources that combine environmental friendliness with biodegradability, low toxicity, renewability, and less dependence on petroleum products has never been greater. One such energy source is referred to as biodiesel. This can be produced from vegetable oils, animal fats, microalgal oils, waste products of vegetable oil refinery or animal rendering, and used frying oils. Chemically, they are known as monoalkyl esters of fatty acids. The conventional method for producing biodiesel involves acid and base catalysts to form fatty acid alkyl esters. Downstream processing costs and environmental problems associated with biodiesel production and byproducts recovery have led to the search for alternative production methods and alternative substrates. Enzymatic reactions involving lipases can be an excellent alternative to produce biodiesel through a process commonly referred to alcoholysis, a form of transesterification reaction, or through an interesterification (ester interchange) reaction. Protein engineering can be useful in improving the catalytic efficiency of lipases as biocatalysts for biodiesel production. The use of recombinant DNA technology to produce large quantities of lipases, and the use of immobilized lipases and immobilized whole cells, may lower the overall cost, while presenting less downstream processing problems, to biodiesel production. In addition, the enzymatic approach is environmentally friendly, considered a "green reaction", and needs to be explored for industrial production of biodiesel.