EXHIBIT 10.1

December 12, 2006

VIA FACSIMILE

Catalytica Energy Systems, Inc.
301 West Warner Road, Suite 132
Tempe, Arizona 85284

Attention:  Richard Weinroth, Secretary and Corporate Counsel

Dear Mr. Weinroth:

Reference is hereby made to the Amended and Restated Preferred Stock Rights
Agreement, dated as of November 22, 2004 (the “Rights Agreement”), between
Catalytica Energy Systems, Inc. (the “Company”), and Mellon Investor Services
LLC, as Rights Agent.  Capitalized terms set forth herein have the respective
meanings ascribed thereto in the Rights Agreement unless otherwise defined
herein.

As of November 30, 2006 (the “Inadvertent Trigger Date”), AWM Investment
Company, Inc. (“AWM”) became the Beneficial Owner of more than 20% of the
Company’s Common Shares then outstanding.  AWM is the investment adviser to each
of the funds listed on Exhibit A attached hereto (each, a “Fund” and,
collectively, the “Funds”).  The number of Common Shares owned by each Fund is
also listed on Exhibit A attached hereto.

AWM understands that, as a result of being the Beneficial Owner of more than 20%
of the Company’s Common Shares outstanding, AWM, together with its Affiliates
and Associates (including, but not limited to, the Funds) (collectively, the
“AWM Parties”) may be deemed to be an Acquiring Person under the terms of the
Rights Agreement.  In order to induce the Company’s Board of Directors to
determine pursuant to Section 1(a) of the Rights Agreement that the AWM Parties
are not an Acquiring Person, AWM, on its own behalf and on behalf of the other
AWM Parties, hereby represents, warrants and agrees as follows:

1.             The AWM Parties were unaware that they beneficially owned a
percentage of the Common Shares that may otherwise cause them to be an
“Acquiring Person” under the Rights Agreement.  The AWM Parties have no
intention of changing or influencing control of the Company.

2.             Within one year from the Inadvertent Trigger Date, AWM shall
cause the Funds to divest a sufficient number of Common Shares so that the AWM
Parties no longer are the Beneficial Owners of 20% or more of the Company’s
Common Shares then outstanding.

3.             AWM will not, and will cause the other AWM Parties not to, become
the Beneficial Owner of any additional Common Shares unless, after giving effect
to any such

--------------------------------------------------------------------------------

acquisition, the AWM Parties would be the Beneficial Owners of less than 20% of
the Company’s Common Shares then outstanding.

4.             This letter has been duly authorized executed and delivered by
AWM, on its own behalf and on behalf of the other AWM Parties, and constitutes
the legal, valid and binding obligation of the AWM Parties, enforceable against
them in accordance with its terms.  The Company’s Board of Directors may rely on
this letter in determining that the AWM Parties are not an Acquiring Person
under the Rights Agreement.

--------------------------------------------------------------------------------

 

AWM INVESTMENT CO., INC.

 

 

 

 

 

 

 

By:

/s/ DAVID M. GREENHOUSE

 

Name:

David M. Greenhouse

 

Title:

Vice President

 

 

 

 

AGREED AND ACKNOWLEDGED:

 

 

 

 

CATALYTICA ENERGY SYSTEMS, INC.

 

 

 

 

By:

/s/ ROBERT W. ZACK

 

 

 

 

Name:

Robert W. Zack

 

 

 

 

Title:

Chief Executive Officer

 

--------------------------------------------------------------------------------

Exhibit A

Name of Fund

 

Shares Owned

 

 

 

 

Special Situations Fund III QP, L.P.

 

2,846,964

 

Special Situations Fund III, L.P.

 

253,101

 

Special Situations Cayman Fund, L.P.

 

899,692

 

 

 

--------------------------------------------------------------------------------