Non-alcoholic fatty liver disease and its downstream sequelae, hepatic insulin resistance and type 2 diabetes, are rapidly growing epidemics, which lead to increased morbidity and mortality rates, and soaring health-care costs. Developing interventions requires a comprehensive understanding of the mechanisms by which excess hepatic lipid develops and causes hepatic insulin resistance and type 2 diabetes. Proposed mechanisms implicate various lipid species, inflammatory signalling and other cellular modifications. Studies in mice and humans have elucidated a key role for hepatic diacylglycerol activation of protein kinase C epsilon in triggering hepatic insulin resistance. Therapeutic approaches based on this mechanism could alleviate the related epidemics of non-alcoholic fatty liver disease and type 2 diabetes.