The approach it took made it very bulky, with awful ergonomics, and it would be difficult to scale up to a more effective caliber. 5.56x45mm is already considered somewhat underpowered for most military purposes, but it is considered "good enough," if just barely. The G11's ammunition would have been even less effective than 5.56x45mm M855; smaller caliber and no tumbling. And I doubt a system like that would be very sand tolerant. I notice that the Russians developed the AN-94 to replicate the G11's multi-shot-before-recoil capability, and then decided that the system was too delicate, with no real advantage over the existing AK-74.
As far as the HK416, any gas piston upper on a standard M16/M4/AR-15 receiver would give the same advantages. But they're right, the 416 was slightly better in dust tests, but not hugely better (and nowhere near as reliable as an AK); the magazines are a weak point, and the system still uses tight clearances for accuracy.
On the civilian side of the fence, there is a lot of excitement about the LMT gas-piston upper, and some say it is better than HK's design:
http://www.m4carbine.net/showthread.php?t=5655LMT already makes some of the highest regarded civilian AR's, and I suspect that some of these uppers will find their way onto some military weapons as well.
Your criticisms of the hydrogen-powered dial-a-gun are spot-on. Ammunition using conventional propellants is stable for many decades, reliable, very consistent shot-to-shot, and there is very little that can fail. The only possible advantage of the electrolysis system I see are in long-range shooting; I suspect that you could drive a small- or intermediate-caliber rifle round somewhat faster with a hydrogen-based system than with nitrocellulose/nitroglycerin/nitroguanidine based systems, due to the lower molecular weights of the combustion products. You'd have to have pretty good shot-to-shot consistency to take advantage of that, though.
And there are also operational considerations. One of the fundamental rules of gun safety is that you do not even point, never mind discharge, a real firearm at someone unless they are putting you in imminent, unlawful danger of death, serious bodily harm, or a forcible felony, or you are otherwise authorized by law to use deadly force or the threat of deadly force against them (e.g., a LEO attempting to apprehend an armed and dangerous suspect). But the dial-a-gun would require you to SHOOT PEOPLE with a firearm capable of killing them, in situations where killing them is not legally or morally justifiable. What worries me is the type of "mission creep" we've seen with Tasers, in which they have become just another compliance tool (won't sign this ticket? I'll tase you...)
I can see the lawsuits coming when (1) an officer who thought the gun was set on "stun" shoots and kills a protester or noncompliant but nonviolent suspect, or (2) an officer who thought the gun was set on full-power shoots and fails to stop a killer because the officer's gun was accidentally set to "stun" instead.
Now, if they can scale this thing up to 120mm smoothbores, it could have some real advantages for AFV weapons systems, though. And an AFV already has onboard electrical power and the capability to carry plenty of the necessary liquid supplies.