A start-up company on the Big Island that envisions selling Hawai'i consumers small hydrogen generation systems to help power their cars and homes has received a big financing tool from the state that could help the environmentally friendly technology firm realize its ambitious goal.

h2 Technologies Inc., a research-oriented firm based in Hakalau received approval to raise up to $50 million in private investment by selling tax-exempt special purpose revenue bonds issued through the state.

The Legislature last month passed the bond financing bill, House Bill 2168, which was signed by Gov. Linda Lingle on Tuesday.

Selling the bonds, however, is not in the immediate future for h2, as it is in a research and development phase expected to last 18 to 24 months before capital is needed for large-scale commercial production.

Also, technical challenges to produce hydrogen at an economical cost for consumers remains a barrier to h2's plan.

Still, some observers see potential in the company's plan, which entails extracting hydrogen from water without using fossil fuel-based electricity.

"It's exciting," said Kay Yamada, project development and government relations manager for the state's High Technology Development Corp. "We are encouraging these new technologies particularly if they are pursuing alternative energies to become self-sufficient as an island state."

h2's genesis stems from a birthday party a few years ago on the Big Island that brought together local resident Guy Toyama and two businessmen from Japan — an inventor with interest in hydrogen, and a wealthy entrepreneur.

The three agreed to start a venture to commercialize hydrogen production and in 2006 formed the company 2085 Now LLC that was later renamed h2 Technologies.

The inventor, Yutaka Wada, developed a patent-pending process that uses an ultrasonic pulse to enhance hydrogen production from water.

The entrepreneur, Chooneui Ham, has financed the h2 project and is described as the company's futuristic-thinking leader, with the title "chief evangelist."

Toyama, a Maui native, is the company's chief operating officer and also general manager for Savers Holdings Ltd., a South Korea-based company developing a desalinated bottled water plant at the Natural Energy Laboratory of Hawai'i Authority.

h2's business plan is to develop a system to produce and store hydrogen for home use. But while conventional hydrogen production through electrolysis uses electricity to separate water's hydrogen and oxygen atoms, h2 intends to use photovoltaic panels or a wind turbine to produce electrolysis without fossil fuel.

"The beauty of the system is we can make our own fuel in Hawai'i," Toyama said.

The hydrogen would be produced in a generator roughly 4 cubic feet in size and stored in a fuel cell in homes to supplement electrical power or to fuel cars modified by h2 to run on hydrogen.

But making hydrogen generators a large consumer appliance may be an idea with more long-term than near-term prospects.

Toyama said h2 has built a small hydrogen generator prototype based on Wada's technology and has converted a high-performance moped and a 1984 Suzuki Samurai to run on pure hydrogen.

The company is building a larger prototype generator to produce hydrogen on a commercial scale and more efficiently than the first model.

If the technology proves viable in the commercial prototype, then some commercial generator production on a small scale would take place, Toyama said. After that step, revenue bonds would be floated to raise capital for large-scale commercial production.

Currently, it takes about 60 kilowatt-hours of power to produce 1 kilogram of hydrogen, which is equivalent to a gallon of gas.

For comparison, a 1 kw photovoltaic system offered by Gentry Homes costs about $15,000 (minus a 35 percent tax credit) and would take 60 hours of sunlight to produce 1 kg of hydrogen.

The average Hawai'i home consumes roughly 20 kWh a day.

h2's goal is to reduce the energy required to produce 1 kg of hydrogen to 45 kWh and aims to make it cheaper for consumers to fuel their car at home with hydrogen than to fill it with gasoline at a station.

Variables in the equation include the price of oil and the cost to produce solar and wind energy. h2 plans to lease hydrogen systems, including fuel cells and solar and wind generation equipment, to customers.

If realized, h2's plan would further the state's goal to have 20 percent of Hawai'i's electricity produced from renewable energy by 2020, which is one reason the revenue bond proposal was supported by the Legislature.

h2 has until June 30, 2013 to issue revenue bonds for its project. Under the arrangement, the company would use operating income to pay off bonds bought by private investors.

The state has no financial obligation in the deal.

Ken Fowler, a substitute teacher on the Big Island interested in renewable energy, testified in support of the revenue bond financing partly because h2's plan brings hydrogen technology closer to a present possibility.

"The price of gasoline and diesel are hitting us hard in the pocketbooks," he said in written testimony. "I believe that Hawai'i must begin acting now to wean itself off of imported fuels, and that Hawai'i has the potential and the incentives to be a leader in converting to a renewable energy based economy."