President Bush has touted hydrogen power as a way to reduce the country's dependence on oil from volatile countries. But hydrogen is three to four times as expensive to produce as gas, according to federal government estimates cited by FuelCell Energy Inc.

FuelCell Energy, based in Danbury, makes fuel cells that generate electricity for power plants while also creating excess hydrogen. The new technology involves converting the extra hydrogen into a purer form that can be used to power cars or for industrial purposes, such as powering chemical production.

The company, which already has used the technology on a small unit at the University of Connecticut Global Fuel Cell Center, won a $1.36 million grant from the U.S. Department of Defense last week to produce a larger version.

"We actually become an enabler for the hydrogen highway," said Dan Brdar, the company's chief executive. "It clearly opens a whole new market segment for us."

Government investments in such technology are vital to make hydrogen power a reality, said U.S. Rep. John Larson, D-Hartford.

"I think it's extraordinarily important," said Larson, a strong advocate of hydrogen power. "This moves us a long way in that direction."

The company expects to begin deploying the technology for industrial use in about two years. Company officials eventually hope to use the hydrogen for cars as well.

The military hopes to use the hydrogen from the fuel cells to power utility trucks such as forklifts and eventually military vehicles, said Frank Holcomb, project leader for the U.S. Army Corps of Engineers.

Officials will evaluate the reliability of the technology and whether it can produce a sufficient amount of hydrogen, Holcomb said.

"We know hydrogen and the hydrogen infrastructure are coming," Holcomb said. "This is just one step to getting us a little bit closer to that. We want to start dabbling in the technology now because we see some of the benefits to it."

The company says its technology will save up to half the energy required by conventional methods to convert the hydrogen for power. That should enable the company to meet government targets to produce hydrogen for $3 to $4 per kilogram, down from $4 to $6, Brdar said.

The unit that will be produced as a result of the federal grant will provide enough hydrogen to run a fleet of 300 cars, Brdar said.

Walter Nasdeo, an analyst for Ardour Capital Investments in New York who follows the company, said using the technology for cars may still take some time.

"I think it's very important as another step in the development of this whole hydrogen-oriented infrastructure we're striving for here," Nasdeo said. "It makes it that much closer to reality."

The prototype at UConn has produced top quality hydrogen, said Kenneth Reifsnider, director of the fuel cell center.

"This brings it to a community of industrial and commercial users that otherwise wouldn't consider hydrogen as a source of energy," Reifsnider said. "This has the potential to bring cost down to a much lower level."