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                                                                   Exhibit 10.26

                 Technology Development and Transfer Agreement

                                    between

                        Kawasaki Heavy Industries, Ltd.

                                      and

                    Catalytica Energy Systems, Incorporated


This Agreement is made as of this 13th day of December, 2000, by and between
Kawasaki Heavy Industries, Ltd. (hereinafter referred to as "KHI"), a Japanese
corporation and having its principal place of business at 1-1 Higashi-Kawasaki-
cho 3-chome, Chuo-ku, Kobe, Japan; and Catalytica Energy Systems, Incorporated
(hereinafter referred to as "CESI"), a Delaware corporation and having its
principal place of business at 430 Ferguson Drive, Mountain View, California,
U.S.A., either or both of which shall also be hereinafter referred to as a
"Party", and together as the "Parties", respectively.

     WHEREAS, CESI has developed expertise and technology of the catalytic
combustion system (hereinafter defined as "XONON Combustion System"), which
incorporates catalytic module(s) which are utilized to oxidize hydrocarbon fuels
in the XONON Combustion System for gas turbines, and CESI has reduced to
practice and commercially demonstrated expertise and technology relating to such
system and module(s) as applied to a Kawasaki model M1A-13A gas turbine at
Silicon Valley Power;

     WHEREAS, KHI desires to obtain from CESI the right to use such expertise
and technology to modify and adapt the XONON Combustion System for installation
on Kawasaki gas turbines of output up to [*] nameplate rating developed and/or
to be developed by KHI, including but not limited to Kawasaki model M1A-13A gas
turbine, (hereinafter defined as "Kawasaki Gas Turbines"), and to obtain from
CESI the right to manufacture and sell Adapted Kawasaki Gas Turbines (as defined
below) based upon the expertise and technology which are reduced to practice and
demonstrated by CESI as applied to the Kawasaki model M1A-13A gas turbine at
Silicon Valley Power;

     WHEREAS, the Parties wish to collaborate in the modification and adaptation
of the XONON Combustion System to the Kawasaki Gas Turbines and to the
development and commercialization of Kawasaki Gas Turbines in accordance with
terms and conditions as set forth herein;

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          NOW, THEREFORE, in consideration of these premises and of the mutual
     covenants herein contained, the parties agree as follows:


1.0  DEFINITIONS
     -----------

     All capitalized words or phrases used throughout this Agreement shall have
     the meanings as defined in this section.

     1.1   "Adaptation Program" means the collaborative program, using the
           Applied CESI Technology (as hereinafter defined), of application
           engineering to modify, adapt and metricate the XONON Combustion
           System, including the XONON Modules (as hereinafter defined) to
           Kawasaki Gas Turbines.

     1.2   "Adaptation Program Technology" means the Technology (as hereinafter
           defined) conceived during the Adaptation Program.

     1.3   "Adapted Kawasaki Gas Turbines" means Kawasaki Gas Turbines not
           larger than [*] adapted and modified under the Adaptation Program.

     1.4   "Adapted M1A-13A" means Kawasaki model M1A-13A gas turbine adapted
           under the Adaptation Program.

     1.5   "Affiliates" mean, with respect to any Person as hereinafter defined,
           any other Person which directly or indirectly controls, is controlled
           by, or is under common control with, such Person. A Person shall be
           regarded as in control of another Person if it owns, or directly or
           indirectly controls, at least fifty percent (50%) of the voting stock
           or other ownership interest of the other Person, or if it directly or
           indirectly possesses the power to direct or cause the direction of
           the management and policies of the other Person by any means
           whatsoever.

     1.6   "Applied CESI Technology" means the CESI Technology as hereinafter
           defined that CESI has reduced to practice and commercially
           demonstrated as applied to a Kawasaki model M1A-13A gas turbine at
           Silicon Valley Power.

     1.7   "Background" means, with respect to the Patents (as hereinafter
           defined) and the Technical Information (as hereinafter defined) that
           a Party or its Affiliates has acquired or acquires prior to the
           Effective Date (as hereinafter defined) or otherwise not (i) in
           connection with its work under this Agreement, or (ii) from the other
           Party.

     1.8   "Catalytic Combustion System" means a gas turbine combustion system
           that employs a catalyst upstream of the turbine inlet which is
           associated with the combustion process, and shall not include SCR,
           SNCR, SCONOx/TM/ or other catalytic devices employed in pollution
           clean-up.

     1.9   "CESI Technology" means the Technology relating to the XONON
           Combustion System and the Xonon Module, including the Background
           Technology, Applied CESI Technology, and the Adaptation Program
           Technology which is now or

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           hereafter may be owned by CESI and/or possessed by CESI (but
           excluding the Adaptation Program Technology developed by KHI
           hereunder and jointly developed by CESI and KHI hereunder) with
           rights to grant others the developmental and/or commercialization
           rights set forth herein.

     1.10  "Effective Date" means the date of this Agreement as first set forth
           above.

     1.11  "Kawasaki Gas Turbines" means Kawasaki designed and manufactured gas
           turbines of output up to [*] nameplate rating, both new and retrofit
           (that is, installed) developed and/or to be developed by KHI,
           including but not limited to Kawasaki model M1A-13A gas turbine.

     1.12  "Patents" mean patents (including patents of importation, patents of
           confirmation, patents of improvements, patents and certificates of
           addition and utility models, as well as divisions, reissues,
           continuations, continuations-in-part, renewals and extensions of any
           of the foregoing) and provisional and regular applications therefor,
           and patents which may be issued on such applications covering
           inventions with respect to which the first application for patent
           anywhere was filed prior to the date of any termination of this
           Agreement.

     1.13  "Person" means an individual, corporation, partnership, trust,
           business trust, association, joint stock company, joint venture,
           pool, syndicate, sole proprietorship, unincorporated organization,
           governmental authority or any other form of entity not specifically
           listed herein.

     1.14  "Products" mean the XONON Module and the XONON Component.

     1.15  "Technical Information" means all technical information, know-how,
           trade secrets, experience, manufacturing techniques, software and
           other copyrightable works, engineering and other data, drawings,
           material and process specifications, whether patented or unpatented,
           whether in written, printed, oral or other form, relating to, in the
           case of KHI, industrial gas turbines having ratings up to [*], and,
           in the case of CESI, the XONON Combustion System and the XONON
           Module.

     1.16  "Technology" means the Patents and the Technical Information.

     1.17  "Third Party" means any Person other than CESI, KHI and their
           respective Affiliates.

     1.18  "XONON Component" means the fuel/air mixer package, the pre-burner,
           and other elements such as combustor hardware components, which are
           necessary combustion system modifications to enable optimum operation
           of the XONON Module.

     1.19  "XONON Module" means CESI catalyst structure as used in gas turbines,
           including its container and supporting structure for fixing the
           catalyst structure, containing and including the catalytically active
           elements for oxidizing hydrocarbon fuels in the container.

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     1.20  "XONON Module Technology", abbreviated XMT, means all Technology
           relating to the XONON Module.

     1.21  "XONON Combustion System", abbreviated XCS, means a fuel combustion
           apparatus or system to implement XMT for use in gas turbines
           including those components, operating processes, and methods of
           control, testing, and operation for pre-heating fuel, mixing fuel and
           air, combusting or oxidizing fuel, controlling power output, and
           control of NOx, Carbon Monoxide(CO) and unburned hydrocarbon
           pollutants, comprising in the XONON Module and the XONON Components.

     1.22  "XONON Combustion System Technology" means all Technology relating to
           the XONON Combustion System.

     1.23  "XONON Control Algorithm(s)" mean the logic developed by or on behalf
           of CESI as of the Effective Date to provide necessary control of the
           start up, operation, management and protection of the XONON
           Combustion System or XONON Module in a gas turbine.

2.0  PROGRAM OBJECTIVES
     ------------------

     2.1   CESI and KHI each shall conduct, at their own expense, their
           respective scope of work as set forth in Exhibit 1 attached hereto as
           an integral part of this Agreement in a sound scientific manner, and
           in compliance in all material respects with all requirements of
           applicable laws and regulations and all applicable good research and
           manufacturing practices to attempt to achieve the Adaptation Program
           objective efficiently and expeditiously. CESI and KHI each shall
           proceed diligently with the works allocated respectively which are
           set out in Exhibit 1 (hereinafter referred to as "Allocated Works")
           by using their respective good faith efforts to provide, among
           others, the following resources: (a) allocation of sufficient time,
           effort, equipment and facilities to the Adaptation Program and as
           each reasonably believes is necessary carry out its Allocated Works
           and to accomplish the objectives thereof, and (b) use of personnel
           with sufficient skills and experience as are required to carry out
           its Allocated Works and to accomplish the objectives thereof. Works
           requested by KHI and performed by CESI outside the Allocated Works
           under this Agreement shall be chargeable to KHI and billed on an
           agreed upon-costs basis, due in 30 days. Each Party is an independent
           contractor.

     2.2   KHI and CESI each may subcontract portions of the Adaptation Program
           to be performed by it in the normal course of its business without
           the prior consent of the other, provided, however, that every
           subcontracted or delegated party shall enter into a confidentiality
           agreement with the subcontracting party in accordance with Article
           7.0 below and each Party shall be fully responsible for any
           activities of its subcontractors or delegated party under this
           Agreement.

     2.3   KHI and CESI each shall appoint a person (a "Program Manager") to
           coordinate its part of the Adaptation Program. The Program Managers
           shall be the primary contacts between the parties with respect to the
           Adaptation Program. Each Party shall notify the other within thirty
           (30) days after the date of this Agreement of the appointment of its
           Program Manager and shall notify

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           the other Party as soon as practicable upon changing this
           appointment.

     2.4   Each Party shall make its employees and relevant reports of non-
           employee consultants available, upon reasonable notice during normal
           business hours, at each Party's respective places of employment to
           consult with the other party on issues arising during the Adaptation
           Program and in connection with any request from any regulatory
           agency, including regulatory, scientific, and technical testing
           issues.

     2.5   KHI and CESI each shall keep the other informed of the progress of
           their tasks under Allocated Works during the Adaptation Program.
           Within thirty (30) days following the end of each quarter during the
           term of the Adaptation Program, KHI and CESI shall each prepare, and
           provide to the other, a written summary report which shall describe
           the application engineering activities performed by such party during
           such quarter.

3.0  PAYMENT OF TECHNICAL FEE BY KHI TO CESI
     ---------------------------------------

     KHI will pay CESI, as the consideration for the CESI Technology to be
     provided by CESI to KHI under this Agreement, the amounts of [*] for each
     of the [*] through [*] Adapted Kawasaki Gas Turbines and of [*] for each of
     the [*] through [*] Adapted Kawasaki Gas Turbines, sold by KHI and/or its
     Affiliates for installation anywhere in the world, provided, however, that
     such payments become due and payable thirty (30) days after KHI's receipt
     of the initial payment for each Adapted Kawasaki Gas Turbines respectively
     sold. Should [*] Adapted Kawasaki Gas Turbines not be sold during the term
     of the Agreement, the balance of payment by KHI shall be forgiven. However,
     in case of earlier termination of the Agreement by KHI prior to the term of
     the Agreement, due to the reason not attributable to CESI under Article
     10.2, the balance of payment by KHI shall be due and payable. KHI agrees to
     make commercially reasonable efforts to sell Adapted Kawasaki Gas Turbines
     during the term of this Agreement and CESI agrees to cooperate with KHI in
     support of KHI's sales efforts.

4.0  TECHNOLOGY AND USE RIGHTS TRANSFERS
     -----------------------------------

     4.1   Technology Transfer. Within thirty (30) days after the Effective
           Date, CESI shall provide KHI with all the available Technical
           Information, including but not limited to those as set forth in
           Exhibit 3 attached hereto as an integral part of this Agreement,
           required to enable KHI to perform its Allocated Works and
           manufacture, have manufactured, use and sell the Adapted M1A-13A and
           the Adapted Kawasaki Gas Turbines, under this Agreement. KHI shall
           provide CESI with all the Technical Information required to enable
           CESI to perfrom its Allocated Works.

           In the event CESI and/or any third party who enters into
           collaboration agreement with CESI and which agreement contains
           provisions permitting CESI to sub-license or otherwise transfer such
           Technical Information to KHI, conceives inventions and/or
           improvements in CESI Technology, Adaptation Program Technology and
           Products solely or jointly with CESI during the term of this
           Agreement, CESI shall provide KHI, [*], with Technical Information
           concerning to such inventions and/or improvements.

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     4.2   Use Rights Under CESI Technology. In consideration for and upon KHI's
           payment of the Technology Fee to CESI provided in Article 3.0 herein,
           CESI hereby grants to KHI for the purposes and term of this Agreement
           a royalty-free, worldwide, right for KHI and its Affiliates to use
           CESI Technology and the inventions and/or improvements as set forth
           in Article 4.1:

           (a)  to perform KHI's Allocated Works in the Adaptation Program;

           (b)  to make, have made, use, lease, and sell the Adapted M1A-13A
                incorporating the Products purchased from CESI;

           (c)  to make, have made, use, lease and sell the Adapted Kawasaki Gas
                Turbines incorporating Products purchased from CESI; and

           (d)  to use and sell the Products to be incorporated into the Adapted
                Kawasaki Gas Turbines including Adapted M1A-13A.

     4.3   The rights granted in Section 4.1 shall be exclusive during the term
           of this Agreement and any subsequent Supply Agreement term, subject
           to KHI and its Affiliates and suppliers purchasing all of their
           respective requirements for the Products for Gas Turbines from CESI,
           and in case that CESI is unable to consistently meet KHI's and its
           Affiliates' requirement for Products from a quality or delivery
           standpoint, CESI shall promptly establish a second source of supply
           (as a vendor to CESI) with a Third Party manufacturer designated by
           CESI and approved by KHI (which approval shall not be unreasonably
           withheld), solely for the purpose of satisfying CESI's obligations to
           supply Products to KHI and its Affiliates.

     4.4   The limited field exclusive rights granted in Section 4.2 shall be
           limited to Kawasaki Gas Turbines, and CESI retains and reserves the
           rights, to itself or through its licensees, to design, adapt, make
           and have made, import, export, use, sell, offer to sell, service,
           repair and reconstruct the Products for sale, lease or transfer to
           Third Parties non-Kawasaki Gas Turbines applications employing the
           CESI Technology.

     4.5   Grant Back. KHI and its Affiliates and subcontractors hereby grant
           back to CESI an irrevocable and fully paid-up license to make, sell,
           lease, have made, use, export and import, service, repair,
           reconstruct the Xonon Combustion System and Xonon Module including
           rights to sublicense, to all improvements thereof, whether made
           solely by KHI or jointly with its Affliates and/or subcontractors,
           which are conceived during the term of this Agreement and the term of
           the Supply Agreement to be concluded between KHI and CESI with
           respect to supply of the Xonon Module. Such license shall be i)
           exclusive with respect to improvements of the Xonon Module, and ii)
           Non-exclusive with respect to improvements of the Xonon Combustion
           System and Xonon Control Algorithm. Such license will permit CESI to
           sublicense said improvements to third parties only to the extent that
           as far as there is in effect a reciprocal agreement between CESI and
           such third party which reciprocity shall provides similar benefits to
           KHI respecting improvements made by that third party.

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     CESI shall notify KHI prior to transferring such Technical Information or
     granting a sub-license. Such Technology or Technical Information as KHI
     must provide to CESI under this section shall be provided without cost to
     CESI and in a reasonable period of time, however, this clause shall not be
     construed so as to unreasonably burden KHI by requiring additional design
     work on its part to fulfil its obligation under this Article 4.5.

     KHI and its Affiliates shall have no responsiblity for any damages incurred
     by CESI and third party including Product Liability arising out of such
     grant back, except for intellectual property infringement.

     4.6   Requirement and Obligation to Use Xonon/TM/ Trademark. CESI hereby
           grants to KHI and its Affiliates for the term of this Agreement, a
           royalty-free, non-exclusive, worldwide right under CESI's Xonon
           trademark, to use the trademark "Xonon/TM/" in connection with KHI's
           and its Affiliates' marketing and sales activities related to the
           Products. In this regard, KHI agrees to market the Xonon Modules
           and/or Xonon Components under CESI's Xonon trademark, and to state in
           its literature that Xonon is technology used under license from CESI,
           in language and format to be agreed between CESI and KHI. This
           agreement on the part of KHI to use the Xonon trademark also requires
           KHI to use the designation "-X" at the end of the model number of all
           Kawasaki Gas Turbines employing CESI Technology. In connection with
           this grant of trademark use rights, KHI agrees that it will submit
           samples of all Xonon trademark usage to CESI for approval prior to
           use in KHI advertising, promotion and/or sales activities and that
           KHI will promptly discontinue any usage of the Xonon trademark which
           CESI specifically objects to and so informs KHI in writing in a
           timely manner. This right to use grant does not confer ownership of
           any rights in the mark(s) to KHI.

     4.7   Grant of Right to Use Xonon Control Algorithms. CESI hereby grants to
           KHI during the term of this Agreement, a non-exclusive, royalty-free,
           perpetual and worldwide license (with rights to sub-license)
           applicable to those models of Kawasaki Gas Turbine to which Xonon was
           adapted during the term of this Agreement, to copy, have copied, use,
           sub-license and offer to sub-license the Xonon Control Algorithm(s)
           for use with the Products applied to Adapted M1A-13A and/or Kawasaki
           Gas Turbines sold during the term of this Agreement.

5.0  PRODUCTS SUPPLIED BY CESI TO KHI
     --------------------------------

     CESI shall supply all of KHI's requirements for the Xonon Module for
     incorporation into the Adapted Kawasaki Gas Turbines pursuant to the terms
     and conditions as set forth in the Supply Agreement to be executed
     separately between CESI and KHI.

6.0  COMBUSTION SYSTEM DESIGN PACKAGE WARRANTY
     -----------------------------------------

     6.1   System Design Warranty. CESI warrants to KHI that the Xonon
           Combustion System, upon design, manufacture and operations approval
           by CESI, will be free of component failure which renders the system
           incapable of substantially meeting the performance specification
           within the first twelve (12) months after

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           placing the initial Xonon Combustion System in commercial service. If
           KHI must repair or replace any combustor system components, under its
           warranty to its end user customer, that are manufactured to CESI's
           approved design, which design has not been modified by any party
           other than CESI, except for metrification by KHI, and provided that
           KHI can reasonably show that the necessity for repair or replacement
           was caused by errors or omissions in the design of the component,
           attributable substantially and directly to CESI, then CESI, as CESI's
           sole liability for this warranty, will pay a proportionate share of
           KHI's costs for the repair or replacement. Such costs shall include
           only KHI's direct cost not including overhead burden, margin or
           profit.

           Further, should KHI pay liquidated damages which arise directly from
           the breach of the foregoing system design warranty then CESI shall
           reimburse the proportion of KHI's liquidated damages substantially
           and directly attributable to CESI's breach of this warranty, subject
           to the cumulative limitation of liability provisions of this
           Agreement.

     6.2   Pressure Drop Warranty. CESI further warrants that, when (a) built to
           CESI's design, and (b) installed on a Kawasaki M1A-13A engine
           equipped with the "low flow" scroll and transition piece with no
           cooling holes, and which engine otherwise meets KHI's performance
           specification for a "new & clean engine"; the combustion system
           pressure drop and combustor "TAD" (as defined in Appendix "A" to this
           Agreement) will meet the performance requirements specified therein.
           Should the gas turbine system not meet this warranty, CESI as its
           sole liability will pay a portion of the liquidated damages (LD's)
           actually paid by Kawasaki for failure to meet kW output and Specific
           Fuel Consumption ("heat rate") commitments to KHI's customer, as
           follows:

     .  CESI will pay [*] of liquidated damages actually paid by KHI to Enron on
        the VAMC Jamaica Plain project provided that such damages arise
        substantially and directly from CESI's failure to meet the pressure drop
        warranty set forth above, pursuant to KHI's agreement with Enron as such
        agreement exists as of the date hereof.
     .  Should KHI be able to negotiate full or partial mitigation of any such
        LD's then CESI's liability shall be proportionally decreased.
     .  Recognizing that the total project power output is the parameter of
        interest, performance deficiencies on one engine will be netted against
        performance gains of any others so that no LD's shall be due if the net
        power output of the three engines meets the total project guarantees.
     .  In all cases CESI shall have the option, at its sole discretion, to make
        corrections to the system in order to improve the performance so as to
        meet the required performance level in lieu of paying LD's and shall be
        given reasonable time and access to make such corrections.

     Should warranted air emissions not meet the guaranteed levels, or the
     requirements of the site air permit, whichever is less stringent, then CESI
     will diligently pursue correction of the problems attributable to its
     guaranteed system components, including on-site investigation and support
     to KHI.

     This warranty shall conclusively be deemed to be satisfied and no further
     liability to

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     CESI shall accrue when any Xonon combustion system, version 2.1, has
     operated satisfactorily for a total period of [*] clock hours connected to
     an electrical power grid or after a period of [*] from the initial
     synchronization of the first Xonon system, version 2.1, to the electrical
     power grid at the Jamaica Plain location, whichever occurs first.

     CESI's total aggregate liability to KHI and its' affiliates for liquidated
     damages and other costs or payments to KHI and its affiliates arising out
     of the warranties contained in this Agreement, shall in no event exceed
     US$[*] per engine or a total of US$[*]. In order for CESI to have any
     liability for liquidated damages for any unit other than those installed at
     Enron's Jamaica Plain project CESI must provide explicit written
     acceptance, at CESI's sole option, of such LD responsibility prior to
     contract execution by KHI.

     In addition to the $[*] limitation for liquidated damages and corrections
     stated above in this Article 6 CESI will be liable for an additional amount
     of up to US$[*], as liquidated damages, payable only in the event that the
     combustion systems at US Veterans Administration Medical Center at Jamaica
     Plain, Boston, MA are required by Enron to be replaced at KHI's cost by
     DLN plus SCR systems due to a failure of the Xonon Combustion System to
     perform to the guarantee conditions set forth in this Agreement and which
     failure was directly and substantially the result of CESI's inability to
     meet its emissions performance obligations under this Agreement and
     provided that CESI shall have been given reasonable opportunity and access
     to correct such performance breach, including the reasonable cooperation
     and support of KHI and its affiliates.

     In any event, KHI shall take all reasonable action and use its best efforts
     to mitigate warranty costs and liquidated damages which CESI may be liable
     to pay and CESI shall only be liable to the extent that such costs and
     damages could not have reasonably been avoided or mitigated by KHI or its
     affiliates or subcontractors.

     THIS WARRANTY IS IN LIEU OF ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
     WITHOUT LIMITATION, WARRANTIES OF MECHANTABILITY AND FITNESS FOR A
     PARTICULAR PURPOSE. All other representations to KHI/KMC and all other
     obligations or liabilities do not constitute a warranty. Liability for
     incidental or consequential damages is specifically disclaimed. No person
     is authorized to give any other warranties or to assume any other liability
     on CESI's behalf unless agreed to in writing by CESI.

7.0  CONFIDENTIALITY
     ---------------

     7.1   Nondisclosure and Use Obligations. Except as otherwise provided in
           this Article 7, during the term of this Agreement and for a period of
           five (5) years thereafter and in no event, for less than a total ten
           (10) years from Effective Date, all information of a confidential
           nature disclosed pursuant to this Agreement by one party to another
           and, in the case of documents, designated by the disclosing party by
           an appropriate stamp, marking or legend as being confidential to the
           disclosing party shall be used by the receiving party only for the
           purposes of this Agreement and shall be maintained as confidential by
           the receiving party, using the same safeguards as it uses to protect
           its own confidential information of a similar character. The
           receiving party will not

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<PAGE>

           publish or disclose to Third Parties any such received information of
           a confidential nature without the prior express written consent of
           the disclosing party. The foregoing obligations on use and disclosure
           of confidential information shall not apply to any information which:

               (a)  is shown by objective evidence to be already in the
                    possession of the receiving party at the time of first
                    receipt from the disclosing party; or

               (b)  is shown by objective evidence to be developed independently
                    by employees of the receiving party who had not had access
                    to the confidential information; or

               (c)  is or becomes part of the public domain without breach of
                    this Agreement by the receiving party; or

               (d)  is made available by the disclosing party to a third party
                    without like obligations on disclosure; or

               (e)  is rightfully obtained by the receiving party from third
                    person without restriction or breach of this Agreement by
                    the receiving party; or

               (f)  in the case of documents, is not designated by an
                    appropriate stamp, marking or legend as being confidential
                    to the disclosing party at the time of disclosure.

     7.2   Oral information disclosed by one Party to the other shall be
           confirmed as confidential by a written summary to be submitted by the
           disclosing party to the receiving party within thirty (30) days after
           the oral transmission thereof. For purposes of this Article 7 ,
           information and data described above shall be referred to as
           "Information".

     7.3   To the extent it is reasonably necessary or appropriate to fulfill
           its obligations or exercise its rights under this Agreement,

               (a)  a Party may disclose Information it is otherwise obligated
                    under this Article 7 not to disclose to its directors,
                    officers, employees, attorneys, accountants, consultants and
                    sublicensees, on a need-to-know basis on the condition that
                    such Persons agree to keep the Information confidential for
                    the same time periods and to the same extent as such party
                    is required to keep the Information confidential;

               (b)  a Party may disclose Information, described in Section 8.1
                    below, that it is otherwise obligated under this Article 7
                    not to disclose to its Affiliates and outside contractors,
                    on a need-to-know basis on the condition that such Persons
                    agree to keep the Information confidential for the same
                    periods and to the same extent as such party is required to
                    keep the information

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<PAGE>

                    confidential; and

               (c)  a Party may disclose such Information to government, other
                    regulatory authorities or any competent court to the extent
                    that such disclosure is required by applicable law,
                    regulation or court order, or is reasonably necessary to
                    obtain patents and to commercially market the Adapted M1A-
                    13A, the Adapted Kawasaki Gas Turbines and the Products,
                    provided that the disclosing party shall provide prior
                    written notice to the other Party and sufficient opportunity
                    to object to such disclosure or to request confidential
                    treatment thereof.

     7.4   Disclosure of Terms. CESI and KHI shall not disclose any terms or
           conditions of this Agreement to any Third Party without the prior
           consent of the other Party, except as required by applicable law.

8.0  PUBLICATION
     -----------

     8.1   Notice of Publication. During the term of this Agreement, CESI and
           KHI each acknowledge the other party's interest in publishing certain
           of its results to obtain recognition within the scientific and
           investment communities and to advance the state of scientific
           knowledge. Each Party also recognizes the mutual interest in
           obtaining valid patent protection and protecting business interests.
           Consequently, either Party, its employees or consultants wishing to
           make a publication (including any oral disclosure made without
           obligation of confidentiality) relating to work performed by such
           Party as part of the Adaptation Program (the "Publishing Party")
           shall transmit to the other Party (the "Reviewing Party") a copy of
           the proposed written publication at least forty-five (45) days prior
           to submission for publication, or an outline of such oral disclosure
           at least fifteen (15) days prior to presentation. The Reviewing Party
           shall have the right (a) to propose modifications to the publication
           for patent reasons or to protect or delete proprietary information,
           and (b) to request a reasonable delay in publication in order to
           protect patentable or proprietary information.

     8.2   Timing of Publication. If the Reviewing Party requests such a delay,
           the Publishing Party shall delay submission or presentation of the
           publication for a period of ninety (90) days to enable patent
           applications protecting each Party's rights in such information to be
           filed. Upon the expiry of forty-five (45) days, in the case of
           proposed written disclosures, or fifteen (15) days, in the case of
           proposed oral disclosures, from transmission to the Reviewing Party,
           the Publishing Party shall be free to proceed with the written
           publication or the presentation, respectively, unless the Reviewing
           Party has requested the delay described above.

     8.3   Disclosure Regarding Agreement. Neither Party shall make a press
           release or other public disclosure of the fact that this Agreement
           has been entered into or any details of its terms without the other
           party's prior consent, unless such disclosure is required, on the
           advice of counsel, to comply with any local, state or federal law or
           regulation, in which case disclosure can be made upon prior

                                      11
<PAGE>

           written notice to the other party.

9.0  TECHNOLOGY AND PATENT RIGHTS
     ----------------------------

     9.1   Ownership of Background Technology. The entire right, title and
           interest in all Background Technology shall be retained by the Party
           owning it. To the extent a Party is granted any right to use
           Background Technology under this Agreement, the use of such
           Background Technology shall be limited to the express purposes of
           this Agreement and for the defined field as appears in this
           Agreement.

     9.2   Ownership of Adaptation Technology. The entire right, title and
           interest in all Adaptation Program Technology (a) conceived by
           employees or others acting solely on behalf of CESI or its Affiliates
           shall be owned solely by CESI, (b) conceived by employees or others
           acting solely on behalf of KHI or its affiliates shall be owned
           solely by KHI. Inventions conceived during the term of this Agreement
           by employees of CESI and KHI, or their respective Affiliates, shall
           be owned jointly by CESI and KHI. The joint interest of inventions
           shall be based on employees or agents of both parties being named as
           inventors in accordance with applicable laws of inventorship of the
           United States. CESI and KHI each hereby represents that all employees
           performing its obligations under this Agreement shall be obligated
           under a binding written agreement to assign to the appropriate owner,
           or as it shall direct, all Technology conceived by such employees.

     9.3   CESI Indemnification. CESI shall indemnify and hold KHI, its
           Affiliates, customers and sublicensees, harmless, and hereby forever
           releases and discharges KHI, its Affiliates, customers, and
           sublicensees, from and against all liabilities, damages and expenses,
           including attorneys' and experts' fees and costs, arising out of any
           claim of patent or copyright infringement or trade secret
           misappropriation brought by a Third Party because of any use of CESI
           Technology, including the Applied CESI Technology and the
           manufacture, use or sale of, or offer to sell, any Product supplied
           by CESI to KHI, provided: (1) such use is in accordance with the
           Product or the Xonon Control Algorithm specifications; (2) CESI is
           notified promptly of receipt of the Third Party claim; and (3) CESI
           is given full control of any defense against such claim. If as a
           result of the claim, the use by KHI of the CESI Technology, including
           the Applied CESI Technology, the Product or Xonon Control Algorithm
           is enjoined, then CESI shall at its option (i) obtain the appropriate
           license from the Third Party claimant to enable KHI and its customers
           to continue such Product or control algorithm use, (ii) modify the
           CESI Technology, including the Applied CESI Technology, the Product
           or Xonon Control Algorithm so that it no longer is infringing, but
           still satisfies agreed upon performance specifications, or (iii)
           replace the CESI Technology, including the Applied CESI Technology,
           the Product or Xonon Control Algorithm with a non-infringing the CESI
           Technology, including the Applied CESI Technology, the Product or the
           Xonon Control Algorithm which satisfies agreed upon performance
           specifications. In the event CESI is unable to eliminate the
           infringement by any of the aforementioned measures, then CESI and KHI
           shall meet and agree on possible alternatives which as a last resort,
           shall include

                                      12
<PAGE>

           CESI taking back any infringing Product or Xonon Control Algorithm
           and refunding the purchase price for such Product or Xonon Control
           Algorithm, subject to KHI's agreement which shall not be unreasonably
           withheld. This indemnity is further subject to the understanding and
           agreement that KHI components are not covered by CESI's warranty
           under this Article 9.3.

     9.4   KHI Patent Indemnification. KHI shall indemnify and hold CESI and its
           subcontractors or sublicensees harmless and forever releases and
           discharges CESI and its subcontractors or sublicensees from and
           against all liabilities, damages and expenses, including attorney's
           and experts fees and costs arising out of any claim of patent or
           copyright infringement or trade secret misappropriation brought by a
           Third Party because of the manufacture, use or sale of, or offer to
           sell, the Adapted M1A-13A and/or Kawasaki Gas Turbines incorporating
           the XONON Combustion System (other than claims attributable to the
           CESI Technology, including the Applied CESI Technology, the Products
           or the XONON Control Algorithm) plus any use of KHI Technology or
           Technical Information pursuant to Article 4.5 of this Agreement by
           KHI, its Affiliates, customers or sublicensees, provided CESI
           notifies KHI promptly of receipt of the Third Party claim and KHI is
           given full control of any defense against such claim. Further, as to
           any CESI technology that is modified and/or adapted by KHI to
           function with Kawasaki Gas Turbines, KHI will fully indemnify CESI
           within the terms of this Article 9.4, unless KHI can reasonably show
           that the failure was (1) caused directly and solely by a CESI error
           or omission and (2) that KHI could not have been reasonably expected
           to detect such an error or omission.

     9.5   Enforcement of Patents and Other Technology Rights. CESI shall, at
           its sole expense, use its best efforts to enforce CESI owned Patents
           and other Technology rights relating to any Products purchased by KHI
           against any infringement of such Patents or unauthorized use or
           misappropriation of such Technology rights by a Third Party of which
           CESI becomes aware. KHI shall promptly notify CESI if KHI becomes
           aware of any such infringement or Technology misappropriation. In the
           event such action includes the bringing of a suit against such Third
           Party, KHI shall provide such assistance as CESI shall reasonably
           request, provided that CESI shall reimburse KHI for all reasonable
           expenses thereby incurred. Costs and expenses, including attorney's
           fees of any lawsuit instituted by CESI shall be borne by CESI. The
           amount of recovery paid to CESI shall belong to and be the sole
           property of CESI.

     9.6   KHI License. In the event KHI conceives inventions or exchanges
           Technical Information comprising improvements and/or modifications to
           the Xonon Module during the period of this Agreement and for five (5)
           years following expiration or termination of this Agreement and/or if
           KHI conceives, by participation in whole or in part of KHI employees
           who had access to CESI Technology, any invention comprising an
           improvement or modification to the Xonon Combustion System and/or
           Xonon Module or develops Technology which is derived from CESI
           Technology, during such period, then KHI shall grant to CESI an
           exclusive royalty-free, perpetual world-wide, irrevocable license
           (with unrestricted rights to sublicense) to make, have made, use,
           sell, lease and/or export Products under both the aforesaid technical
           information and

                                      13
<PAGE>

           any Patents which result from the aforesaid inventions

     9.7   CESI License. In the event CESI conceives inventions or exchanges
           technical information comprising improvements and/or modifications to
           KHI Gas Turbines, other than combustion systems, during the period of
           this Agreement and for five (5) years following expiration or
           termination of this Agreement and/or if CESI conceives, by
           participation in whole or in part of CESI employees who had access to
           KHI Technology, any invention relating to the aforesaid gas Turbines
           or develops gas turbine technology which is derived from KHI
           Technology, during such period, then CESI shall grant to KHI an
           exclusive royalty-free, perpetual, world-wide, irrevocable license
           (with unrestricted right to sublicense) to make, have made, use,
           sell, lease and/or export KHI Gas Turbine under both the aforesaid
           technical information and any Patents which result from the aforesaid
           inventions.

     9.8   Patent Filing Procedure. In cases of sole inventors during the term
           hereof, the inventing party shall retain the sole right to determine
           whether or not Patent applications will be filed, and whether Patents
           and Patent applications will be maintained, on any such inventions
           which are solely conceived by its employees. With regard to
           inventions conceived jointly by both parties during the Adaptation
           Program under this Agreement and Patents arising from such joint
           inventions which shall be the joint property of CESI and KHI. Both
           parties shall be free to utilize the same and to license third
           parties only as described in Article 4.0 of this Agreement. With
           respect to such joint inventions, each party has the right to file
           the Patent on such inventions in any country and to jointly own such
           Patent to be filed and/or registered. And the party who has made
           Patent application shall keep the other party fully advised of the
           status of the prosecution of each such jointly conceived Patent
           application and shall consult with such other party in advance with
           respect to the advisability of continuing said prosecution in the
           event of any final rejection, appeal, interference, or the like, and
           each party may, at any time by ten (10) days' notice to the other
           party, elect not to continue to pays the services and expenses
           incurred after the date of said election with respect to any such
           Patent or Patent application; provided, however, that if either party
           elects to proceed, the other party who does not want to continue such
           prosecution or payment shall assign to the party electing to proceed
           all rights to the Patent or Patent application with respect to which
           the election is being made. Neither party hereto shall be obligated
           to make any payments for or on account of proceedings before any
           court or any other tribunal or agency in connection with the
           maintenance or assertion of any Patents based on joint inventions.

     9.9   No Other Technology Rights. Except as otherwise provided in this
           Agreement, under no circumstances shall a Party, as a result of this
           Agreement, obtain any ownership interest or other right in any
           Technology, know-how, Patents, pending patent applications or
           products of the other Party, including items owned, controlled or
           developed by the other, or transferred by the other to such Party at
           any time pursuant to this Agreement.

10.0 TERM AND TERMINATION
     --------------------

     10.1  Term. The term of this Agreement is five (5) years unless extended in
           writing for an additional period by mutual agreement of the parties
           at least 60 days in

                                      14
<PAGE>

           advance of the expiry hereof.

     10.2  Early Termination. KHI may, in its sole discretion (after giving due
           regard to CESI's concerns), terminate this Agreement prior to its
           expiration date by written notice to CESI setting forth such
           expiration date. However, should thirty-eight (38) Adapted Kawasaki
           Gas Turbines be not sold until such termination, the balance of
           payment stipulated in the Article 3 shall be payable to CESI at the
           time of such termination. Should CESI terminate the Agreement during
           the term of this Agreement, by its sole discretion, KHI's obligation
           for above balance of such payment shall be forgiven.

     10.3  Termination for Cause. Either party may terminate this Agreement for
           cause upon the occurrence of any of the following:

               (a)  The other party shall (a) seek the liquidation,
                    reorganization, dissolution or winding up of itself (other
                    than dissolution or winding up for the purposes of
                    reconstruction or amalgamation) or the composition or
                    readjustment of all or substantially all of its debts, (b)
                    apply for or consent to the appointment of, or the taking of
                    possession by, a receiver, custodian, trustee or liquidator
                    of itself or substantially all of its assets, (c) make a
                    general assignment for the benefit of its creditors, (d)
                    commence a voluntary case under the Bankruptcy Code, (e)
                    file a petition seeking to take advantage of any other law
                    relating to bankruptcy, insolvency, reorganization, winding-
                    up or composition or readjustment of debts, or (f) adopt any
                    resolution of its Board of Directors or stockholders for the
                    purpose of effecting any of the foregoing; or

               (b)  A proceeding or case shall be commenced without the
                    application or consent of the other party and such
                    proceeding or case shall continue undismissed, or an order,
                    judgment or decree approving or ordering any of the
                    following shall be entered and continue unstayed in effect,
                    for a period of ninety (90) days from and after the date
                    service of process is effected upon the other party, seeking
                    (a) its liquidation, reorganization, dissolution or winding
                    up, or the composition or readjustment of all or
                    substantially all of its debts, (b) the appointment of a
                    trustee, receiver, custodian, liquidator or the like of
                    itself or of all or substantially all of its assets, or (c)
                    similar relief under any law relating to bankruptcy,
                    insolvency, reorganization, winding up or composition or
                    readjustment of debts; or

               (c)  Except as otherwise provided in Article 10.5 below, upon or
                    after the breach of any material provision of this
                    Agreement, if the breaching Party has not cured such breach
                    within ninety (90) days after notice thereof from the other
                    Party, this Agreement shall terminate for cause, at the
                    option of the other Party, upon the expiration of such
                    ninety (90) day cure period.

                                      15
<PAGE>

     10.4  In case of termination of this Agreement by KHI in accordance with
           Article 10.3 due to the causes attributable to CESI, CESI agrees that
           (i) CESI shall supply KHI with the Product to be incorporated into
           Kawasaki Gas Turbines for the project of which order KHI has already
           received from its customers; and (ii) KHI has the right as set forth
           in Article 4.2 after the termination of this Agreement, until such
           time as this Agreement would naturally expire had KHI not terminated
           this Agreement.

     10.5  Effect of Termination. Termination of this Agreement shall not
           relieve the parties of any obligation accruing prior to such
           termination. The provisions of Articles 4.3 and 4.5 [Technology and
           Use Rights Transfer], Article 6 [Warranty and Representation by
           CESI], Article 7 [Confidentiality], Article 9 [Technology and Patent
           Rights], Article 11 [Settlement of Disputes] and Article 12
           [Indemnity] shall survive the expiration or any termination of this
           Agreement.

11.0 SETTLEMENT OF DISPUTES
     ----------------------

     In the event that any disputes arise between CESI and KHI which cannot be
     amicably settled by the parties, each party shall have the right to request
     binding arbitration on the issue. In such event, CESI and KHI shall agree
     on a single, qualified, legally and technically trained, independent
     arbitrator to review the relevant evidence and render a decision on such
     disputes including whether(disputes including but not limited to)
     termination is justified under the circumstances. The arbitration shall be
     held in Los Angeles, California, U.S.A., unless otherwise agreed by the
     parties. Although the rules of commercial arbitration of the AAA may be
     employed, its auspices need not be employed. Both parties shall use all
     reasonable efforts to select the independent arbitrator and complete the
     arbitration within sixty (60) days after the notice of request for
     arbitration. The decision of the arbitrator shall be final and binding, and
     the non-prevailing party shall pay all of the costs of the arbitrator. If
     arbitration is requested hereunder, in no event shall any remedies provided
     in this Agreement and triggered by default under this Article 11.3 be
     implemented until after the decision of the arbitrator has been rendered.

12.0 INDEMNITY
     ---------

     12.1  Direct Indemnity. Each party shall indemnify and hold the other
           party, its Affiliates and sublicensees harmless, and hereby forever
           releases and discharges the other party, its Affiliates and
           sublicensees, from and against all claims demands, liabilities,
           damages and expenses, including attorneys fees and costs (all
           "Liabilities"), in respect of personal injury to or death of third
           parties, or in respect of loss of or damage to any third party's
           property, arising out of any breach of a representation or warranty
           contained herein, negligence, recklessness or intentional wrongful
           acts or omissions of the indemnifying party, its Affiliates or
           sublicensees in connection with the work performed by such party
           during and after the term of this Agreement except in each case to
           the extent such Liabilities resulted from negligence, recklessness or
           intentional wrongful acts or omissions of the other party. Neither
           party shall be liable to the other for any special, indirect,
           incidental or consequential damages arising out of any terms or
           conditions in this Agreement or with respect to the performance
           thereof.

                                      16
<PAGE>

     12.2  Procedure. A party (the "Indemnitee") that intends to claim
           indemnification under Article 12.1 shall promptly notify the other
           party (the "Indemnitor") of any Liability or action in respect of
           which the Indemnitee or any of its Affiliates intend to claim such
           indemnification, and the Indemnitor shall have the right to
           participate in, and, to the extent the Indemnitor so desires, jointly
           with any other Indemnitor similarly noticed, to assume the defense
           thereof with counsel selected by the Indemnitor. The indemnity
           obligations under Article 12.0 shall not apply to amounts paid in
           settlement of any loss, claim, damage, liability or action if such
           settlement is effected without the consent of the Indemnitor, which
           consent shall not be withheld unreasonably. The failure to deliver
           notice to the Indemnitor within a reasonable time after the
           commencement of any such action, if materially prejudicial to its
           ability to defend such action, shall relieve such Indemnitor of any
           liability to the Indemnitee under Article 12.0, but the omission so
           to deliver notice to the Indemnitor will not relieve it of any
           liability that it may have to any Indemnitee otherwise than under
           Article 12.0. The Indemnitor may not settle the action or otherwise
           consent to an adverse judgment in such action that diminishes the
           rights or interests of the Indemnitee without the express written
           consent of the Indemnitee. The Indemnitee, its employees and agents,
           shall cooperate fully with the Indemnitor and its legal
           representatives in the investigation of any action, claim or
           liability covered by this indemnification at Indemnitor's expense.

13.0 EXCUSABLE DELAY
     ---------------

     Neither party shall be held liable or responsible to the other party nor be
     deemed to have defaulted under or breached this Agreement for failure or
     delay in fulfilling or performing any term of this Agreement to the extent,
     and for so long as, such failure or delay is caused by or results from
     causes beyond the reasonable control of the affected party including but
     not limited to fire, floods, embargoes, war, acts of war (whether war be
     declared or not), insurrections, riots, civil commotion, strikes, lockouts
     or other labor disturbances, acts of God or acts, omissions or delays in
     acting by any governmental authority or the other party. The foregoing
     shall be subject to the delayed party using reasonable efforts to mitigate
     the adverse consequences of such delay.

14.0 ASSIGNMENT
     ----------

     This Agreement may not be assigned or otherwise transferred, nor, except as
     expressly provided hereunder, may any right or obligations be assigned or
     transferred by either party without prior consent of the other party;
     provided further, however that (i) each party may assign its rights and
     interests, and delegate its obligations, hereunder, effective upon written
     notice thereof, to any Affiliate, and (ii) either party may assign its
     rights and interests, and delegate its obligations, hereunder, effective
     upon written notice thereof, to any Third Party which acquires all or
     substantially all of the assets of CESI or KHI, as the case may be, or
     which is the surviving third party in a merger or consolidation with either
     of CESI or KHI as the case may be, if such Third Party assumes all of the
     obligations of CESI or KHI, as the case may be, hereunder. Subject to the
     foregoing, any reference to CESI or KHI hereunder shall be deemed to
     include the successors thereto and assigns thereof. Notwithstanding
     anything to the contrary contained in this Article 14.0, if, without KHI's
     prior written consent, either (a) CESI

                                      17
<PAGE>

     assigns or otherwise transfers its rights and interests under this
     Agreement to any Competing Manufacturer (defined below) including any
     transfer by merger or asset sale; or (b) any Competing Manufacturer
     purchases or otherwise obtains a controlling ownership interest (defined as
     50% or more ownership interest) in CESI; then this Agreement shall
     terminate upon KHI's election and written notice thereof to CESI and such
     termination shall be deemed a termination for cause under Article 10.3. For
     the purposes of this Agreement, "Competing Manufacturers" shall mean only
     companies that design, manufacture and sell gas turbines of less than [*]
     for power generation or mechanical drive applications.

15.0 SEVERABILITY
     ------------

     Each Party hereby acknowledges that it does not intend to violate any
     public policy, statutory or common laws, rules, regulations, treaty or
     decision of any government agency or executive body thereof of any country
     or community or association of countries. Should one or more provisions of
     this Agreement be or become invalid, the parties shall substitute, by
     mutual consent, valid provisions for such invalid provisions which valid
     provisions in their economic effect are sufficiently similar to the invalid
     provisions that it can be reasonably assumed that the parties would have
     entered into this Agreement with such provisions. In case such provisions
     cannot be agreed upon, the invalidity of one or several provisions of this
     Agreement shall not affect the validity of this Agreement as a whole,
     unless the invalid provisions are of such essential importance to this
     Agreement that it is to be reasonably assumed that the parties would not
     have entered into this Agreement without the invalid provisions.

16.0 MISCELLANEOUS
     -------------

     16.1  Price, Payment and Escalation. Out of scope work to be billed at
           CESI's then current US DOE approved rates. Terms are net 30 days,
           late payments subject to one point five (1.5) percent (%) per month
           charge. Payments must be made by electronic funds transfer to CESI's
           bank in US funds, net of all exchange rates, taxes, excepting CESI's
           tax on income of its operations, imposts, duties, and foreign
           governmental license taxes or fees.

     16.2  Notices. Any consent, notice or report required or permitted to be
           given or made under this Agreement by one of the parties to the other
           shall be in writing, delivered personally or by facsimile (and
           promptly confirmed by personal delivery, U.S. First class mail or
           courier), U.S. first class mail or courier, postage prepaid (where
           applicable), addressed to such other party at its address indicated
           below, or to such other address as the addressee shall have last
           furnished in writing to the addressor and (except as otherwise
           provided in this Agreement) shall be effective upon receipt by the
           addressee.

           If to CESI:  Catalytica Energy Systems, Inc.
                        430 Ferguson Drive
                        Mountain View, CA 94043, U.S.A.
                        Attention: Patrick T. Conroy, Sr. Vice President

                                      18

[*] - Confidential information has been deleted from this section.
<PAGE>

           If to KHI:   Kawasaki Heavy Industries, Ltd.
                        Gas Turbine Division
                        1-1, Kawasaki-cho, Akashi 673-8666, Japan
                        Attention: Yoshihiro Asada
                                   International Sales Manager
                                   Industrial Gas Turbine Center

     16.3  Applicable Law. This Agreement shall be governed by and construed in
           accordance with the laws of the State of California, without regard
           to the conflicts of law principles thereof.

     16.4  Agreement Limited to Express Terms. Except as otherwise expressly
           provided in this Agreement, the parties agree that the Adaptation
           Program contemplated herein, and any discussions or communications
           between the parties relating thereto, shall not restrict, either
           party's right to take whatever future actions such party unilaterally
           determines to be in its best interest, including the right to
           undertake similar programs or relationships with Third Parties
           covering subjects related to the matters covered herein, and neither
           the holding of any discussions between the Parties, nor the exchange
           of any information shall diminish or restrict in any way the right
           that any party has to market, lease, sell or otherwise make available
           its products and services to any customer or Third Party.

     16.5  KHI shall be liable for the breach of this Agreement by any its
           Affiliates.

     16.6  Entire Agreement. This Agreement contains the entire understanding of
           the Parties with respect to the subject matter hereof. All express or
           implied agreements and understandings, either oral or written,
           heretofore made are expressly superseded by this Agreement. This
           Agreement may be amended, or any term hereof modified, only by a
           written instrument duly executed by both parties.

     16.7  Headings. The captions to the Articles and Sections hereof are not a
           part of the terms but are merely guides or labels to assist in
           locating and reading the Articles and Sections hereof.

     16.8  Independent Contractors. It is expressly agreed that CESI and KHI
           shall be independent contractors and that the relationship between
           the two parties shall not constitute a partnership, joint venture or
           agency. Neither CESI nor KHI shall have the authority to make any
           statements, representations or commitments of any kind, or to take
           any action or undertake any obligation, which shall be binding on the
           other party, without the prior consent of the other party.

     16.9  Waiver. The waiver by either Party of any right hereunder or the
           failure to perform or of a breach by the other party shall not be
           deemed a waiver of any other right hereunder or of any other breach
           or failure by said other party whether of a similar nature or
           otherwise.

                                      19
<PAGE>

     16.10 Counterparts. This Agreement may be executed in two or more
           counterparts, each of which shall be deemed an original, but all of
           which together shall constitute one and the same instrument.



     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.

AGREED FOR AND ON BEHALF OF                 AGREED FOR AND ON BEHALF OF
KAWASAKI HEAVY INDUSTRIES, LTD.             CATALYTICA ENERGY SYSTEMS, INC.
GAS TURBINE DIVISION

By:                                         By:

       ---------------------------------           -----------------------------
Name:  Kengo Yamashita                      Name:  Patrick T. Conroy

       ---------------------------------           -----------------------------
Title: Director and General Manager of      Title: Senior Vice President
       Gas Turbine Division

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

                                      20
<PAGE>

                                   Exhibit 1

                                Allocated Works
                                ---------------

CESI and KHI each shall conduct, at their own expenses, their respective scope
of works as follows:

1. CESI:
   1)  to transfer the Technology relating to the XONON 2.1 Combustion System,
       as defined in Exhibit 3, excluding XONON Module
   2)  to incorporate XONON 2.1 modification into the SVP configuration, testing
       of updated configuration and refinement as required to demonstrate the
       capacity to meet the performance specification defined in Exhibit 2.
   3)  to host additional meetings at CESI's facilities with KHI's engineering
       staff to ensure an effective transfer of technical data, and making a
       reasonable number of trips to KHI facilities to participate in design
       meetings and to provide consultation.
   4)  to transition the SVP controls information to support KHI's development
       of the production control system.
   5)  to provide reasonable support to KHI's development of an integrated
       control system for its' M1A-13X packages.
   6)  to document specification for maintenance and operation of the XONON 2.1
       combustor.
   7)  to provide 1 week of engineering support to assist in Factory Acceptance
       Testing at the Kawasaki Packager's U.S. facility.
   8)  to provide 3 weeks of engineering support to assist in Site
       commissioning.

2. KHI:
   1)  to modify the XONON 2.1 Combustion System to metricate, cost reduce and
       otherwise adapt the design to enhance its integration into the Kawasaki
       Gas Turbines, including model M1A-13A model with low flow scroll
       configuration.
   2)  to provide technical information to CESI for the M1A-13A and M1A-13D as
       required in support of CESI's XONON 2.1 development activities.
   3)  to provide engine performance and emissions data from the XONON 2.1
       engine testing at Akashi.

                                      21
<PAGE>

                                   Exhibit 2

                          Performance Specifications
                          --------------------------

CESI Xonon 2.1 system emissions Performance Specification


     1.  Air emissions, when operating on natural gas fuel of a composition
         within the range specified in Exhibit 4, equal to or less than the
         concentrations specified in this section all corrected to 15 % Oxygen
         in the engine exhaust; with the ambient air temperature between 0
         degrees F and 120 degrees F at sea level elevation and with the engine
         load between [*] and [*] of the temperature and altitude corrected
         nameplate rating of the M1A-13X, without consideration for any gearbox
         or other accessory equipment limitations on power output of the
         machine. (reference drawing X21/K15-08200 Rev.A)

     2.  Oxides of Nitrogen (NOx) equal to or less than 2.5 parts per million
         plus the cumulative calculated accuracy limits of test instrument
         system.

     3.  Carbon Monoxide (CO) equal to or less than 10 parts per million plus
         the cumulative calculated accuracy limits of test instrument system.

     4.  Unburned Hydrocarbons (UHC) equal to or less than 10 parts per million
         plus the cumulative calculated accuracy limits of test instrument
         system.

     5.  Emissions testing will be performed in accordance with the applicable
         requirement and methods as adopted by the MDEP and the U.S. EPA as
         listed below. NOx, O2 and CO2 will be tested in accordance with U.S.
         EPA Gas Turbine Test Method 20 located in Appendix A of 40 CFR 60. CO
         will be in accordance with Method 25E. The UHC testing will be in
         accordance with Method 25E. Mass Flow (both pollutants and exhaust
         flow) will be determined using Method 19.

                                      22

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<PAGE>

                                   Exhibit 3

                             Technical Information
                             ---------------------

CESI shall provide KHI with all the Technical Information for the Xonon 2.1
combustor as follows:

1.  XONON 2.1 Bill of Material(BOM)
2.  Engineering Drawings for Fabricated Combustor Hardware, Sub Assemblies and
    the Top Level Assembly
3.  By Pass Valve Specifications
4.  Part Numbers and Sources for "Off the Shelf" Hardware
5.  Drawings for Special Tooling or Handling Equipment used on the Combustor at
    SVP
6.  "Pro Engineer" part and drawing files for the Combustor Hardware and
    Assemblies
7.  Written Instructions of the Combustor Assembly Process
8.  Written Instructions for the Catalyst Module Change Out Procedure
9.  2-D Finite Element Analyses of XONON 2.1 Combustor Excluding the Catalyst
    Module
10. SVP Engine Test results from Silicon Valley Power (SVP) test installation
    for Configuration Incorporating XONON 2.1 Upgrades;
    a.  Combustion system overall aerothermal performance
    b.  Engine operating data
    c.  Preburner aerothermal performance
    d.  Mixing system aerothermal performance
    e.  Measured temperatures
    f.  Bypass system measured performance
11. Description of Existing XONON 2.0 Control System and Incremental Changes
    for XONON 2.1 Control System
12. I/O list for SVP

                                                                            END.

                                      23
<PAGE>

                                   Exhibit 4

                               Natural Gas Fuel
                               ----------------

A composition of natural fuel gas for Performance Specifications in Exhibit 2 is
specified as follows:
The turbine is to be operated on gaseous fuel with methane as the dominant
component, Acceptable maximum concentrations (on an inerts-free basis) of other
gaseous species are as follows :

                   Ethane (C2)                      4.0 mol%
                   Propane (C3)                     1.5 mol%
                   Butanes and higher (C4 plus)     0.2 mol%

Fuels with compositions outside of the above limits must be referred to
Catalytica for evaluation.
The combustor cannot be operated on a liquid fuel.

Contaminants in the fuel (i.e., species containing elements other than carbon,
hydrogen, and/or oxygen) that could affect catalyst durability or performance
must be removed to acceptable levels, Although they are unlikely to be present
in the fuel supplied to the turbine, the presence of any of the following
elements may require special precautions for cleanup:

                      Antimony      Calcium       Phosphorus
                      Arsenic       Chromium      Potassium
                      Bismuth       Lead          Sodium
                      Boron         Magnesium     Vanadium
                      Cadmium       Mercury

Low levels of sulfur-containing species are not injurious to the catalyst
itself, but they can be harmful to downstream equipment. The specifications for
the turbine should be consulted for limits on sulfur concentrations.

Detection of any of these species in the fuel supplied to the turbine should be
discussed with Catalytica.

NOTE: The catalyst module itself can operate on a fuel of Wobbe Index (Lower
Heating Value basis) as low as 900 (e.g., 15 mol% CO2) to as high as 1200.
Current control systems are designed for fuels with Wobbe index of 1150-1200.
Lower Wobbe values would require modifications to fuel valves and piping to
provide for higher fuel flow rates. Consult with Catalytica regarding
feasibility of specific fuels.

                                      24
<PAGE>

                                  Appendix A

1.   Drawings

     All drawings necessary to procure fabricated components for Xonon Ver. 2.1
     must be complete and shipped to KHI by either FedEx or DHL by November 1,
     2000.(( Part numbers for purchased items (e.g. bolts, thermocouples,
     standard flanges, etc.) will be provided in place of drawings.)) Proof of
     shipment shall be by providing the shipping company's tracking number.
     Failure to ship such drawings by 1 November 2000 shall result in an
     assessment of liquidated damages of [*] per day until such time as all
     drawings are complete and shipped to KHI.

2.   Combustion System Performance as affecting Power Output

     When equipped with a Xonon 2.1 combustion system which system's pressure
     drop does not exceed [*] as measured from compressor discharge plenum
     flange to 1st stage turbine nozzle inlet and which system's Tad (2) is at
     least [*] degrees C, and which system is installed on a Kawasaki M1A-13A
     gas turbine (with the "low flow" scroll and transition piece with no
     cooling holes) , in new and clean condition, and otherwise conforming to
     Kawasaki's performance specification then power output shall not be less
     than [*] kWe when corrected to site conditions (3) and while meeting the
     emissions levels specified below. Should the power fall between [*] and [*]
     kWe, on a per engine basis, then liquidated damages of $[*] shall be
     assessed in a pro-rated manner across this range--and CESI shall pay [*]
     thereof. If [*] kWe cannot be achieved, then a remedy action must be
     undertaken. Power and efficiency shall be measured by ANSI / ASME PTC 22-
     1985.

3.   Combustion System Performance as affecting Heat Rate

     When equipped with a Xonon 2.1 combustion system which system's pressure
     drop, does not exceed [*] as measured from compressor discharge plenum
     flange to transition piece inlet and which system's Tad (2) is at least
     [*] degrees C, and which system is installed on a Kawasaki M1A-13A gas
     turbine (with the "low flow" scroll and transition piece with no cooling
     holes) in new and clean condition, and otherwise conforming to Kawasaki's
     performance specification, then the heat rate, as measured in accordance
     with ANSI / ASME PTC 22-1985 shall not exceed [*] BTU / kWh-e at [*] kWe
     output, when corrected to site conditions (3) and while maintaining the
     emissions levels specified below. Should the heat rate exceed [*] BTU /
     kWe-hr, but be less than [*] BTU/kWe-hr, then liquidated damages of $[*]
     shall be assessed in a pro-rated manner across this range on a per machine
     basis--and CESI shall pay [*] thereof. If [*] BTU/kWe-hr cannot be
     achieved, then a remedy action must be undertaken.
     Exhaust Gas Temperature

     The exhaust gas temperature must be more than [*] degrees C at [*] kW while
     meeting the emissions specified below; except that during the new catalyst
     break-in period of [*] the exhaust gas temperature shall be not greater
     than [*] degrees C.

4.   Emissions
     The required emissions are as follows:
     1)   NOx       2.5 ppm

                                      25

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<PAGE>

     2)   CO        10 ppm
     3)   UHC       10 ppm
     4)   [*]

     If the above mentioned emissions cannot be achieved, then a remedy action
     must be undertaken. Such remedy action may include the addition of a
     compressor air bleed.

5.   Turn Down Operation

     Stable operation must be achieved from [*] load while complying with the
     emissions levels listed above. In the event that the Enron contract does
     not require turndown to [*] load then CESI's obligation for % turndown
     shall be no greater than Kawasaki's contractual obligation.

______________________________
NOTES:

(1)  All measurements must be per mutually acceptable procedures.

(2)  Tad is defined as the [*]. The Tad calculation is based on [*]
 .  Combustor air flow defined as a fixed fraction of the total engine air flow
   with zero air flowing through the bypass and bleed systems. [*]
 .  Natural gas fuel with LHV = 908 BTU/ft 3 and specific gravity = 0.5868

(3)  Site Conditions:
Elevation                 100 Ft.MSL
Atmospheric pressure      14.7 psig
Ambient temperature       59 degree F ( 15 )
Inlet pressure drop       [*] inch W.C.
Exhaust pressure drop     [*] inch W.C.
Combustor pressure drop   [*] measured from compressor discharge plenum
                          flange to 1st stage turbine nozzle inlet

                                      26

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