Inter-residue potentials are extensively used in the design and evaluation of protein structures. However, dealing with all (20×20) interactions becomes computationally difficult in extensive investigations. Hence, it is desirable to reduce the alphabet of 20 amino acids to a smaller number. Currently, several methods of reducing the residue types exist; however a critical assessment of these methods is not available. Towards this goal, here we review and evaluate different methods by comparing with the complete (20×20) matrix of Miyazawa-Jernigan potential, including a method of grouping adopted by us, based on multi dimensional scaling (MDS). The second goal of this paper is the computation of inter-residue interaction energies for the reduced amino acid alphabet, which has not been explicitly addressed in the literature until now. By using a least squares technique, we present a systematic method of obtaining the interaction energy values for any type of grouping scheme that reduces the amino acid alphabet. This can be valuable in designing the protein structures.