What kind of fuel do they use?

In the past (2006) they have been using onboard reforming of LPG and the like to produce H2 for use in a PEM fuel cell.

A fuel cell providing residential Combined Heat & Power (CHP) is much more efficient at generating electricity than burning primary energy in a central power station.

It might eventually be cost-effective too:
In a cold climate, if a small CHP fuel cell ran non stop to provide base heat load for 8 months of the year, the owner would reduce his electricity bill by the difference between the price of electricity (say 10 c/kWh?) and Natural Gas (say 2 c/kWh?), so saving say 8 c/kwh for 24 hrs per day for 240 days:
$0.08 * 24 * 240 = $460.
It would still take 10 years to recover the capital cost of $4600, and the maintenance costs of a fuel cell are currently higher than an ordinary gas furnace.
Hence to be commercially viable, the capital cost needs to come down further below $4600 per kW and the maintenance costs of PEM fuel cells need to improve.
Modest production volumes of 150,000 fuel cells by 2015 will enable the development of manufacturing experience. Hopefully by then research will have reduced the capital costs (for example by reducing the precious metal content) and reduced maintenance costs.

Considering that the precious metal content of a 100kW fuel cell currently costs more than a complete 100kW ICE, it is likely that 1kW micro CHP would become commercially viable long before a 100kW fuel cell car.

The relevance to green cars is that micro CHP could provide an early market for fuel cells and fund research and development.

The reason japan does this so early is thier electric rates are very high but their gas rates arnt.. So you can save alot of money with a small fuel cell powered by nat gas.

Dont forget in some places electric rates are 30 40 even 50 cents per kilowatt. Meanwhile nat gas is cheaper then it is in the us by maybe a factor of 10.

CNG prices in the U.S. is heavily manipulated. Most states sell CNG at an average of $3.00/gal. In next door Canada, the same gal of CNG is priced at .60 cents. Can you say bug in the VR sim??

That's nonsense. Retail natural gas prices in Japan are also very high.

The economics of this application won't fly - I heard this from a senior engineer of one of Japan top gas utilities (so in theory they should be biased towards this app...).

Honda has sold 50,000 Combined Heat and Power units that have a small natural gas engine in them. You can get them in a limited part of the US too from Climate Energy. They are far more cost effective than solar cells and should be used in every commercial building in the US of any size unless the Capstone Microturbine CHP units are already in use. Ancient technology allows such CHP units to be used for cooling as well. Competition is needed in this market to get the prices into a lower range. The engine powered units can be made to have an overall efficiency that is higher than fuel cells at much lower costs. Power companies should be required to pay enough for the generated electricity to pay for the gas used and the capital and maintenance cost. The gas companies should be required to deliver gas to such units at an equivalent price that they give to utilities. Then there would be no reason to burn natural gas in furnaces, boilers or water heaters and the CO2 release from home heating and lighting can be reduced by 40%. ..HG..