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Similar to many net oil importing Sub-Sahara African countries, Ethiopia’s economy is rural and as it stands today it is far from being a fossil fuel based economy. Instead, the economy is largely powered by traditional burning of solid biomass. Despite its small share in the overall energy supply (7%), imported fuel absorbs half of Ethiopia’s foreign currency earnings. The common justifications behind the development of biofuels such as energy source diversification, foreign currency saving, rural poverty alleviation through employment and technology transfers were all appealing for Ethiopian policy advisers. In 2007, mostly influenced by the global discourse, Ethiopia launched a biofuel expansion strategy and a massive ad hoc investment promotion of two biodiesel crops: castor and jatropha. In this paper, we synthesize the various biodiesel development initiatives and modes of production, and point out at the gaps in policy formulation and project implementation. Evaluating the prospect and constraints for biodiesel production in Ethiopia, we conclude that most of the prerequisites for a viable biodiesel industry still need to be met. We identify key areas and priorities to further strengthen the development of the biodiesel sector. [ABSTRACT FROM AUTHOR]