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Due to the rapid growth of industrialization and population leads to energy demand. In future fuel consumption may leads to high, so there is need of alternative fuel is essential to manage the crisis of energy demand. The bio-diesel can be derived from many sources like vegetable oil, seed oil, animal fat etc..,. The major part in alternative fuel is extraction of oil and other further process of preparation from raw material. So this tends to promote the renewable resources to harvesting the bio-diesel from algae. The extraction oil from the biomass of algae collected from open pond system, the oil extracted by cold pressing method. This experiment aim is produce bio-diesel from algae oil and followed blend with diesel. The experimental setup has been performed to comparison between the diesel and three different blends along with bio-diesel (algal oil) to notice performance and combustion characteristics of VCR engine. The bio-diesel has been prepared by using transesterification method and Hcl is used as catalyst. There is a viscosity changes in algae oil which is converted into algal oil bio-diesel by transesterification process. Finally engine test is conducted at various loads at different ratio of blends and additive. Di-Methyl ether is used as a additive, that may increase the performance of engine. Then studies about the performance and emission characteristics of Variable Compression engine running with algal oil as bio-diesel blended with diesel. There is a differences had been noticed in performance of VCR engine by using diesel and bio-diesel blends with diesel.