Eventually, the technology will save a typical household 60,000 yen a year in heating bills, officials say. But that could be years away because of initial start-up costs. By using hydrogen and oxygen to produce electricity, home-water heaters of the future will do the job without spewing carbon dioxide.

With government subsidies, the environmentally friendly devices will be installed in homes on a limited rental basis in April by Tokyo Gas Co. In March, Nippon Oil Corp. will offer the service.

As higher emission standards set by the Kyoto Protocol have kicked in this month to thwart global warming, hopes are high for what is touted as the world's first commercially produced home fuel cell.

The co-generation fuel cell is now used in a model house at the Tokyo Gas Techno Station in Tokyo's Arakawa Ward. It consists of two devices: One resembles the outdoor component of an air conditioner; the other, a tall narrow storage room.

The tank has a capacity for 200 liters of hot water; the smaller unit is a miniature power station.

The system uses a proton-exchange-membrane (PEM) fuel cell, like an automobile battery.

Hydrogen, extracted from methane, is combined with oxygen to produce water and electricity. The fuel cell generates 1 kilowatt of electricity to cause a chemical reaction, heating water up to 60 degrees.

Inside the cell, methane is treated to release hydrogen; and a heat recovery device warms the water.

The Nippon Oil version works on a similar principle, except hydrogen is extracted from liquefied petroleum gas. While no carbon dioxide is released as it generates power, the gas is released when hydrogen is extracted. Even so, the method is more environmentally friendly than conventional water heaters. By generating power and heat, it makes effective use of energy, which helps cut down on overall carbon-dioxide emission, officials said.

Both types of fuel cells incorporate energy saving applications. They generate power as needed, without storing electricity.

The cells shut down late at night and start up each morning, generating power based on electricity consumption. Hot-water tanks for baths are filled by evening.

The hot water produced as a by-product is stored in a tank that fills by bath time. If there is not enough, an auxiliary burner heats more water. A computerized system takes care of each step from start to finish.

According to Tokyo Gas, only 37 percent of electricity generated at thermal power plants is actually used. The rest is simply wasted or lost when transmitted to homes.

But fuel-cell co-generation-producing power and heat on site as needed-will turn 31 percent of natural gas energy into electricity, and 40 percent into heat. In all, 71 percent gets used.

According to calculations, if the fuel cell is going at full throttle, it can slash carbon dioxide emissions by 40 percent. Energy consumption can be cut by 26 percent, compared to producing the same amount of power and hot water with conventional water heaters powered by thermal power stations.

``It will suit homes that use a lot of hot water,'' said Wataru Fujisaki of Tokyo Gas. ``You use more gas, but overall, you end up using fewer natural resources.''

The model household will be able to save about 60,000 yen annually on electricity and gas utilities, according to Tokyo Gas estimates.

But before it can become a common household fixture, the cost of the system must come down and the battery life needs to be extended.

Tokyo Gas aims to eventually market the system at 500,000 yen, down from the current manufacturing cost of several million yen per unit.

The government plans to offer a 6-million-yen subsidy for each unit.

Hirokazu Matsuo, chief of Nippon Oil's energy division said: ``Numbers will bring the cost down. But cutting costs is tough. If we don't start now, they will never become widely used.''