Abstract Microalgal biomass is a renewable, carbon-neutral resource and an excellent alternative to petroleum-footed fuels. In this work the open outdoor raceway pond system was used for the cultivation of Chlorella vulgaris. The biomass productivity was 31.5 mg L-1d-1 and lipid content 25 ± 5% when cultivated in low cost medium (Urea, Superphosphate and Potash at 91.9, 72.9 and 62.7 mg L-1 where the pH was 8.03) formulated by RSM. The highest FAME yield was 67% under the optimized conditions of H2SO4 at 4%; reaction time at 4 h; methanol-hexane as co-solvent in the ratio of 2:1; and temperature at 80 °C for 100 mg of algal lipid. The DU, LCSF, CFPP, CN, PP, CP of the biodiesel evidenced high quality, which corroborate with International standards. The diesel engine performance showed a blend of B50 which is superior in quality compared to B20 and B40 blends and the commercial diesel. Furthermore, reduction of brake-specific fuel consumption at 100% load showed 273.9 g/kW h in B50 whereas for commercial diesel it was 275 g/kW h. There was 40–55% reduction of CO, HC, and emissions compared to commercial diesel. Thus, this research emphasizes that microalga-based biodiesel is cost-effective and eco-friendly choice for biodiesel.