It's been a busy week on Capitol Hill for those interested in hydrogen as an energy source.

On Thursday, the U.S. Fuel Cell Council, an industry group, holds its annual Congressional expo, complete with a caucus room full of company exhibits and rides in hydrogen-powered vehicles.

The Senate Committee on Energy and Natural Resources heard testimony on Monday from Chevron and General Motors execs on the implementation of the hydrogen and fuel cell provision of last year's Energy Policy Act.

"We still need major technological advances to ensure hydrogen can be affordable, safe, cleanly produced and readily distributed," said Sen. Lamar Alexander, R-Tenn., at the Monday hearing.

Just across the river in Alexandria, Va., H2Gen Innovations' 40 employees are advancing all those goals. The company's tale illustrates both the promise of the hydrogen economy and the hazards involved when the feds turn to the private sector for research and development.

H2Gen's story begins in the mid-1990s, when founders Sandy Thomas and Frank Lomax worked for Arlington consultancy Directed Technologies on an engagement for Ford Motor. The topic: the feasibility of producing sufficient hydrogen for a fleet of fuel-cell vehicles. (For the uninitiated, fuel cells generate electricity by combining hydrogen and oxygen. Think of your grade-school electrolysis experiment, only in reverse).

In their research, Thomas and Lomax saw an opportunity to make hydrogen, at low cost and on a relatively small scale, with a technology known as steam methane reforming. In brief, a steam methane reformer subjects water (H2O) and natural gas, which is essentially methane (HCH4), to intense heat and a series of catalysts. The process re-forms the molecules, isolates the hydrogen, and emits carbon dioxide as a waste product.

Several years and patents later, Thomas and Lomax's steam methane reformer, called the HGM 2000, is being sold. The unit, about the size of your average garden shed, pumps out purified hydrogen at a rate of 2,000 cubic standard feet an hour, enough to fuel about 20 cars a day, or 2 to 3 buses. How so? That purified hydrogen can be stored in a tank on a fuel cell vehicle. From the tank, the hydrogen feeds into a fuel cell stack, which produces electricity that powers an electric motor.

The company has leased several HGM 2000s as part of a pre-commercial program and notched three commercial sales. One of those three will be set up at a hydrogen fueling station, and two have gone to buyers who need hydrogen for their industrial processes. Such customers, which include semiconductor manufacturers and food processors, have been served by chemicals giants like Air Products and Praxair.

H2Gen Chief Executive Barney Rush says H2Gen also hopes to sell a key component of its technology, a purification apparatus, to those who would like to reuse the hydrogen they now acquire from other sources. In dollar terms, H2Gen will pull in a few million in revenues this year. By the end of 2007, Rush forecasts that the company will have operating income--in the sense of earnings before interest, taxes and depreciation--on $15 million in sales.

Rush signed on as chief executive of H2Gen three years ago, following a six-year stint at electric utility Mirant. Rush, who left a year before Mirant's bankruptcy in 2003, ran its European operations, which in the flush days of 1999 posted sales of $976 million. Following Enron's collapse in 2001, however, a ratings downgrade and tough times in the equity markets forced Mirant to abruptly exit Europe. "The last six months," Rush recalls, "I was basically winding down everything I'd worked to build over six years."

When he returned stateside, Rush found himself looking for work at age 50. At the time, H2Gen had built its prototype and needed someone with commercial experience to raise money and sell the technology. Rush, who in addition to his energy industry experience had worked on project financing at Lehman Brothers, fit the profile.

Another plus to his résumé: Rush was no stranger to Washington, having served during President Jimmy Carter's administration as a special assistant to the Undersecretary of State for Economic Affairs. Rush's Beltway experience complemented that of Thomas, H2Gen's co-founder, who worked as a legislative assistant to Sen. Tom Harkin, D-Iowa, on matters of national security, energy and environment.

And H2Gen has had its share of dealing with the feds. In 2004, the company won a competition for a two-year, $5.4 million grant from the Department of Energy for research into distributed reformation technologies. Announcing the win, H2Gen touted the grant as validation of its technology and a chance to learn more about making cheaper hydrogen from renewable sources, such as ethanol.

Lately, however, that grant money has become a source of frustration for H2Gen. Why? The appropriations process. Earmarks, Rush explains, have crowded the federal government's hydrogen budget. This has forced the Department of Energy, with whom Rush says H2Gen has an excellent relationship, to delay funding its priorities, even for peer-reviewed projects such as H2Gen's.

Rush says he has contacted the office of Rep. Jim Moran, D-Va., who represents H2Gen's district, but he isn't holding his breath, given the vagaries of the appropriations process. As for hiring a lobbyist to intervene, Rush dismisses the idea. "How crazy is that?" he asks. "It's very hard for us to think we should pay some expensive lobbyist to try and get an earmarking for a project that we've already won once."

If it's any consolation to H2Gen, they're not alone in having complaints about deferred funding. At the Senate hydrogen hearing on Monday, the Energy and Natural Resources committee heard from James Balcom, chief executive at PolyFuel, a maker of membranes for fuel cells. Balcom urged Congress to reinstate funding of work on portable fuel cells, in which PolyFuel specializes, deferred by the Department of Energy because of budget constraints.

That hearing also made it clear why such funding is important to companies the size of H2Gen or PolyFuel. Donald Paul, chief technology officer at Chevron, told the committee his company spends $50 million a year in research on fuel cell issues, including reforming technology similar to H2Gen's.

Despite the big-gun competition, H2Gen continues to attract venture capital. This week, it announced a $10.6 million funding round led by Mellon HBV and joined firms @Ventures, Commons Capital and Chrysalix Energy Management, among others.

For investors looking to make related bets in the equities market, the accompanying table includes a few publicly traded outfits doing business in fuel cells and hydrogen.

Fuel Cell Plays

Prices as of July 19

Sources: FT Interactive Data, Reuters Fundamentals and Thomson IBES via FactSet Research Systems