So I was playing around with power gen and noticed that something wasn't quite right.

In the 1.6.4 version of Mekanism this system used to work:
Water-->Electrolytic Separator-->Hydrogen-->Gas-Burning Generator-->Energy-->Power for Separator and Extra

Now It is not a positive feedback loop but instead a perfect stalemate with the same energy being produced as consumed. I don't believe this is intentional.

It is perfectly intentional. See #1037. Previous behaviour was just plainly unphysical.