Disc Flac's guide doesn't really explain the "key" items in the system menu. Why the option to set keys A-H?

I've never used those but If I can remember correctly, each key is used differently. I think one of the keys requires you to select the item in your inventory in order to open a door or trigger a specific event you've created. I'm sure the scanned RPGM manual has this answer. I don't really bother with those key options anyway.

some years back i experimented with this. you simply face the object you want to open, load your inventory and select a key. i dont like this method at all as players can get confused as to what to do as there is no prompts to let them know how to solve the problem. save the key item effect for something special and note it well so the player understands what to do.

How does one even make an event that uses a key item?

make a key with the setting of "a" or any letter up to "h." then make an event that triggers when a key is used (its in the command line of touch, check ect)

And to make things a little easier, key items aren't selectable by default but do become selectable once you're standing at something that it can be used on. Key items have one-time use.

I myself find them very useful and have several instances of use early on in SR. The first couple times, the game lets them know that a key item needs to be used. But in the first real dungeon, the player is left with only subtle clues that can be missed if you're not paying attention.