Third-generation biofuels research and development is largely focused on algae as a raw material. Early research demonstrated that energy yields from a given surface area are far greater from algae than from plants currently used in producing biofuels. The great potential of algae is, however, clouded by a number of technical and economic hurdles which must be overcome before algae contributes in any significant way to providing energy for transportation. Among these are reduction of nutrient requirements in cultivation and energy requirements in processing. For the near to mid-term, at least, algae-derived biofuels are unlikely to pose competitive risks to the emerging second-generation cellulose-based biofuels industry.