A control algorithm is developed for highly efficient operation of auxiliary power unit (APU) that consists of a diesel engine and a directly coupled induction generator in series hybrid electric Bus (SHEB). In a series hybrid configuration the APU supplies the electric power needed for maintaining the state of charge (SOC) of the battery unit in various conditions of vehicle operation. As the rotational speed of generator does not depend on the vehicle speed, an optimized operation of engine-generator unit based on the efficiency map of each component can be achieved. The output torque of diesel engine can be controlled by the amount of fuel injection, and the power converted from mechanical to electrical energy can be adjusted by generate control unit (GCU) using the decoupling vector control of torque and flux. As for the given reference of the generating power, the multiply of speed and torque, many combinations of operating speed and torque are possible. The algorithm decides the new operating point based on the engine efficiency map and generator characteristic curve. During the transition of operating points, the speed controller saturation is avoided using variable limit and filtering of generator torque reference. A test rig and SHEB consist of a 1.5L diesel engine and a 30kw induction generator are constructed by Hyundai Motor Company.