"Driving innovation through targeted investments helps to speed development of next-generation biofuels made in America, biofuels that will help to protect American families and businesses from the ups and downs of the global oil market," Energy Secretary Steven Chu said in a statement.
The Energy Department said the so-called bio-oil precursors could find their way into gasoline, diesel and jet fuels without the need to modify distribution networks or engines.
The government said prototype programs could target algae, dedicated energy crops, wood residues and other sources of biofuels.
Critics of biofuels say some programs require more energy to convert crops into fuel than the amount of energy the new fuel would save. Other alternatives may give off more greenhouse gases than conventional counterparts.
The Energy Department said it expects to fund as many as 10 bio-oil prototypes in the current fiscal year.