<PAGE>

                                                                   Exhibit 10.31

                          CONSULTING SERVICES AGREEMENT
                          -----------------------------

     This agreement made and entered into and effective as of the 1st day of
January 2002, by and among John A. Urquhart, whose address is 111 Beach Road,
Fairfield, Connecticut 06430, hereinafter called "Consultant" and Catalytica
Energy Systems Inc, located at 430 Ferguson Drive, Mountain View, California,
94043:

                                   WITNESETH:
                                   ---------

     WHEREAS, Catalytica Energy Systems Inc. (collectively referred to herein as
the "Clients", are desirous of retaining Consultant on the terms and conditions,
and for the consideration hereinafter set forth; and

     WHEREAS, Consultant is desirous of providing consulting services to the
Clients on such terms and conditions and for such consideration;

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties do hereby agree as follows:

     (1)  Term: This agreement will commence on January 1, 2002 and shall extend
          ----
          through December 31, 2002 (the "Term"). The Term of this Agreement may
          be extended by the written agreement of the parties.

     (2)  Position and Services:
          ---------------------

          A.   When requested by the Clients, Consultant will consult with
               senior officers of the Clients regarding the development and
               implementation of an integrated strategic business plan and
               regarding such other matters concerning the Clients' business and
               operations as they may request from time to time during the term
               of this Agreement.

               The services to be provided by Consultant pursuant to paragraph A
               of this Agreement are personal to Consultant and may not be
               assigned By Consultant.

     (3)  Compensation and Benefits:
          -------------------------

          A.   During the Term of this Agreement, Consultant shall be paid a fee
               of Twenty Five Thousand Dollars ($25,000.) to be paid on a
               quarterly basis at $6250.00 per quarter (i.e.; March, June,
               September, December.

          B.   Company shall pay Consultant for all reasonable travel and
               transportation expenses, actually incurred by Consultant in
               performance of services


                                  Page 1 of 4

<PAGE>

               requested by the Clients under this Agreement, as authorized and
               approved in writing by the Chairman or the President of the
               Company.

     (4)  Confidentiality of Clients' Business: Consultant acknowledges that
          ------------------------------------
          Clients' business is highly competitive and that Clients' books,
          records and documents, Clients' technical information concerning their
          products, equipment, services, and processes, procurement procedures
          and pricing techniques, the names of and other information (such as
          credit and financial data) concerning Clients' customers and business
          affiliates, all comprise confidential business information and trade
          secrets of the Clients which are valuable, special, and unique
          proprietary assets of the Clients. Consultant further acknowledges
          that protection of Clients' confidential business information and
          trade secrets against unauthorized disclosure and use is of critical
          importance to the Clients in maintaining their competitive position.
          Accordingly, Consultant hereby agrees that consultant will not, at any
          time during or after the Term of this Agreement, make any unauthorized
          disclosure of any confidential business information or trade secrets
          of the Clients, or make any use thereof, except for the benefit of,
          and on behalf of, the Clients. However, Consultant's obligation under
          this Section 4 shall not extend to information which is or becomes
          part of the public domain or is available to the public by publication
          or otherwise than through the Consultant, nor to information given
          through testimony under oath that may be required by a court of law or
          pursuant to law. The provisions of this Section 4 shall survive the
          termination of this Agreement.

     (5)  Conflict of Interest: Consultant agrees to use Consultant's best
          --------------------
          efforts, skill and abilities so long as Consultant's services are
          retained hereunder to promote the best interest of the Clients and
          their business. As part of the consideration for the compensation to
          be paid to Consultant hereunder, and as an additional incentive for
          the Clients to enter into this Agreement, the Clients and Consultant
          agree to the noncompetitive provisions of this Section (5). During the
          Term of this Agreement, Consultant agrees that, unless prior written
          approval of the Chairman of Company, or other officer of Company
          designated by the Chairman, is obtained, Consultant will not directly
          or indirectly for Consultant or for others;

           (i)    Conduct, advise, counsel, or otherwise assist any competitor,
                customer or supplier of the Clients or any affiliate which, in
                any manner, would have, or is likely to have, an adverse effect
                upon the Clients or any affiliate;

           (ii)   Consult, advise, counsel, or otherwise assist any Federal or
                State regulatory agency on any matter or in a regulatory
                proceeding which, in any manner, would have, or is likely to
                have, an adverse effect upon the Clients or any affiliate;

          Consultant understands that the foregoing restrictions may limit
          Consultants ability to engage in a business similar to Clients'
          business during the period


                                  Page 2 of 4

<PAGE>

          provided for above, but acknowledges that Consultant will receive
          sufficiently high remuneration and other benefits from the Clients
          hereunder to justify such restriction. The Clients shall be entitled
          to enforce the provisions of this Section (5) by resorting to
          appropriate legal and equitable action.

     (6)  Indemnification:
          ---------------

          A.   Consultant hereby indemnifies and agrees to protect, defend, and
               hold harmless the Clients, their directors, officers, and
               employees from and against all claims, suits, demands, damages,
               losses, costs and expenses brought by any person firm, or
               corporation for (i) injuries to or the death of Consultant, or
               employees and agents of the Consultant, or damage to or loss of
               property of Consultant, or employees and agents of Consultant
               arising from or in connection with Consultant's performance of
               services under this Agreement, including the sole or contributory
               negligence of the Clients, and (ii) injuries to or the death of
               third parties, or damage to or loss of property of third parties
               arising from or in accordance with Consultant's gross negligence
               or willful misconduct.

          B.   The Clients hereby indemnify and agree to protect, defend, and
               hold harmless Consultant, Consultant's agents and employees from
               and against all claims, suits, demands, damages, losses, costs
               and expenses brought by any person, firm, or corporation for
               injuries to or the death of any employees of the Clients, or
               damage to or loss of property of the Clients arising from
               Clients' negligence, including the contributory negligence of
               Consultant.

     (7)  Independent Contractor:
          ----------------------

          A.   The parties hereto agree that the services rendered by Consultant
               in the fulfillment of the terms and obligations of this Agreement
               shall be as an independent contractor and not as an employee, and
               with respect thereto, Consultant is not entitled to the benefits
               provided by Clients to their employees including, but not limited
               to, group insurance and participation in Client's employee
               benefit and pension plans.

          B.   Consultant shall be responsible for payment of all taxes
               including Federal, State, and local taxes arising out of
               Consultant's activities in accordance with this contract,
               including by way of illustration but not limitation, Federal and
               State income tax, Social Security tax, Unemployment Insurance
               taxes, and any other taxes or business license fees as required.

     (8)  Notices: Except as otherwise provided in this Agreement, all notices
          -------
          required or permitted by the terms hereof shall be sent by Certified
          Mail to following address if sent to the Clients, then to:


                                  Page 3 of 4

<PAGE>

                         Catalytica Energy Systems, Inc.
                         430 Ferguson Drive
                         Mountain View, California, 94043

          and if sent to Consultant, to Consultant's address set forth at the
          beginning of this Agreement.

     (9)  Entire Agreement; Modifications: This Agreement constitutes the entire
          -------------------------------
          agreement of the parties with regard to the subject matter hereof,
          supercedes any and all prior agreements with respect to Consultant's
          engagement by Company and contains all of the covenants, promises,
          representations, warranties and agreements between the parties with
          respect to Consultant's engagement hereunder. Each party to this
          Agreement acknowledges that no representation, inducement, promise or
          agreement, oral or written, has been made by any party, which is not
          embodied herein, and that no agreement, statement, or promise relating
          the engagement of Consultant hereunder, which is not contained in this
          Agreement shall be valid or binding. Any modification of this
          Agreement will be effective only if it is in writing and signed by
          each of the parties.



                                                 JOHN A. URQUHART

                                                     /s/ John A. Urquhart
                                                 -------------------------------

                                                 CATALYTICA ENERGY SYSTEMS, INC.

                                                 By: /s/ Craig N. Kitchen
                                                    ----------------------------
                                                 Name:   Craig N. Kitchen
                                                 Title:  President & CEO


                                  Page 4 of 4