Sources said the plan is being explored by the state government in association with a Swedish company.
Officials said a team from Sweden is likely to arrive in the state capital within the next few days and hold discussions with UPSRTC officials.
A trial run would follow soon, an official said, adding UPSRTC Managing Director Mukesh Meshram was monitoring the project personally, as it was also his brainchild.
The move is likely to save the state exchequer between Rs. 75-80 crores annually.
The UPSRTC has 9,000 buses, and the initiative will be introduced in 10 percent of the fleet.
Based on success of the pilot project, bio-fuel would be introduced extensively in a phased manner, officials said.