SUBSCRIPTION AGREEMENT

         This  SUBSCRIPTION  AGREEMENT (this  "Agreement") is  made and entered
into  as  of the  28th day of November, 2000 by  and between  Cinergy  Energy
Solutions,  Inc.  ("CES"),  a  wholly-owned  indirect  subsidiary  of  Cinergy
Solutions Holding Company,  Inc. ("CHSC"), U.S. Energy Systems, Inc., a Delaware
corporation  ("USE"),  and  USE Acquisition  Corp. a Delaware corporation  (the
"Company,") a wholly-owned subsidiary of USE.

                                    RECITALS

         CES desires to  subscribe  for 4,574 shares of Class B Common Stock the
Company (the "Shares") for  $11,500,000  (the  "Subscription  Price"),  upon and
subject to the terms and conditions of this Agreement.

         The Company  shall use the proceeds  received  from CES in exchange for
the  Shares to  finance  in part the  acquisition  of Zahren  Alternative  Power
Corporation,  a Delaware corporation ("ZAPCO") pursuant to an Agreement and Plan
of Reorganization and Merger by and among USE, the Company and ZAPCO dated as of
the date hereof (the "Merger Agreement").

         NOW,  THEREFORE,  in  consideration  of and in reliance  upon the above
Recitals, which by this reference are incorporated herein, the terms, covenants,
conditions and representations  contained in this Agreement,  and other good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged, the parties hereto agree as follows:

         1.       Subscription.  In  consideration  for the payment of the
Subscription  Price in cash  payable by CES, the Company agrees to issue to CES
the Shares.

         2.       Representations; Warranties; Covenants.

                  A.  CES  represents  and  warrants  to the  Company  that  the
following are true,  complete and correct as of the date of this  Agreement and,
where applicable, covenants with the Company as follows:

                           (i) CES is duly  organized,  validly  existing and in
         good  standing  under  the laws of the  State of  Delaware  and has all
         requisite  corporate  power and authority to enter into this Agreement,
         the  Indemnification  Agreement  dated as of the date hereof  among the
         Company  , USE and  CES,  (the  "Indemnification  Agreement  ") and the
         stockholders'  agreement dated as of the date hereof among the Company,
         CES  and  USE  (the   "Stockholders'   Agreement"   and  together  with
         Indemnification   Agreement  and  this   Agreement   the   "Transaction
         Agreements") and perform its obligations hereunder and thereunder.

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                           (ii) The execution,  delivery and  performance of the
         Transaction  Agreements (a) have been duly  authorized by all necessary
         corporate  action,  and (b) do not and  will  not  violate,  breach  or
         constitute a default (or an event which with or without  notice  and/or
         lapse  of  time   would   constitute   a   default)   under  the  CES's
         organizational  documents,  any  agreement or instrument by which it is
         bound or any law, regulation,  order, award, judgment, decree, license,
         permit or instrument to which it is subject. Each Transaction Agreement
         is valid and enforceable  against the Subscriber in accordance with its
         terms,  except as such  enforceability  may be  limited  by  applicable
         bankruptcy,  insolvency,  reorganization  and  similar  laws  affecting
         creditors' rights generally and applicable equitable principles.

                           (iii)  CES  has  obtained  all  consents,  approvals,
         novations,  waivers or notifications of any third party or governmental
         entity  (collectively,  "Consents")  which are necessary or required on
         its part for the consummation of the  transactions  contemplated by the
         Transaction Agreements.

                           (iv)   There   is   no   action,   suit,   legal   or
         administrative   proceeding,   arbitration,   investigation   or  other
         proceeding  or claim  pending or, to the  knowledge of CES,  threatened
         against,  or  affecting  CES  that,  if  adversely  determined,   might
         reasonably be expected to have a material adverse effect on its ability
         to  consummate  the   transactions   contemplated  by  the  Transaction
         Agreements.

                           (v) CES  understands  that the  Shares  have not been
         registered under the Securities Act of 1933, as amended (the "Act"), or
         the securities or similar laws of any state and are offered in reliance
         on exemptions therefrom.

                           (vi) CES understands  that neither the Securities and
         Exchange   Commission  nor  any  other  Federal  or  state  agency  has
         recommended,  approved or endorsed the  acquisition of the Shares as an
         investment or passed on the accuracy or adequacy of the information set
         forth in any Company's documents.

                           (vii) CES is a special purpose C Corporation which is
         an indirect wholly owned subsidiary of CSHC.

                           (viii) CES confirms  that the Shares were not offered
         to it by any means of general solicitation or general advertising, that
         it   has   received   no   representations,   warranties   or   written
         communications  with  respect to the  offering of the Shares other than
         those   contained  in  this   Agreement,   and  in  entering  into  the
         transactions  contemplated  by the  Transaction  Agreements  CES is not
         relying  upon  any  information  other  than  that  contained  in  this
         Agreement and the results of its own independent investigation.

                           (ix) CES is acquiring  the Shares  solely for its own
         account,  for  investment  purposes  only,  and not  with a view to the
         distribution or resale thereof.

                           (x) CES  acknowledges  that the  Company is making no
         representations   concerning   the  value  of  the  Shares   except  as
         specifically set forth herein.

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                           (xi)  CES will not  sell or  otherwise  transfer  the
         Shares without registration under the Act or an exemption therefrom and
         agrees  that it must  bear the  economic  risk of the  purchase  for an
         indefinite period of time because, among other reasons, the Shares have
         not been  registered  under the Act or under the securities laws of any
         state and, therefore,  cannot be resold, pledged, assigned or otherwise
         disposed  of unless  it is  subsequently  registered  under the Act and
         under  applicable  state  securities  laws or an  exemption  from  such
         registration is available. CES understands that the Company is under no
         obligation  to register the Shares on behalf of CES or to assist CES in
         complying with any exemption from such registration under the Act.

                           (xii) CES  acknowledges,  represents,  agrees  and is
aware that:

                                    (a)     the  Company has  no  financial  and
                  operating history;

                                    (b)   the    representations,    warranties,
                  agreements,  undertakings and  acknowledgments  made by CES in
                  this  Agreement  are made with the intent  that they be relied
                  upon by the Company in determining the suitability of CES as a
                  purchaser of the Shares and shall  survive the issuance of the
                  Shares to CES; and

                                    (c) the  Shares  are  illiquid  and CES must
                  bear the  economic  risk of its  purchase of the Shares for an
                  indefinite period of time.

                           (xiii)   Assuming  the  accuracy  of  USE's  and  the
         Company's  representations and warranties contained in Sections B and C
         hereof and ZAPCO'S  representations and warranties contained in Section
         3.29 of the Merger  Agreement,  the  consummation  of the  transactions
         described  herein  shall not cause USE,  the  Company or the  Surviving
         Corporation (as such term is defined in the Merger Agreement) to become
         (i) an "affiliate" of an "electric  utility  company," or a "subsidiary
         company"  of an electric  utility  company as such terms are defined by
         the Public Utility  Holding  Company Act of 1935 ("PUHCA") (ii) subject
         to the  Federal  Power Act or  Natural  Gas Act,  or (iii)  subject  to
         regulation as a "public  utility," a "local  distribution  company," an
         "electric  load serving  entity" or a similar  entity under the laws of
         any state,  except to the extent with respect to the foregoing  clauses
         (i),  (ii)  and  (iii)  that  USE  or  the  Company  or  the  Surviving
         Corporation is already subject to regulation as such thereunder.

                           (xiv) Assuming the accuracy of USE's  representations
         and   warranties   contained   in   Section   C  hereof   and   ZAPCO'S
         representations and warranties  contained in Section 3.29 of the Merger
         Agreement,  the consummation of the transactions described herein shall
         not cause any  qualifying  facility  within  the  meaning of the Public
         Utility  Regulatory  Policies Act of 1978 ("PURPA") and 18 C.F.R.  Part
         292 ("Qualifying  Facility") in which USE, the Surviving Corporation or
         any of their subsidiaries owns an equity interest to lose its status as
         such under PURPA.
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<PAGE>
                           (xv) CES  acknowledges  that it understands  that the
         Company intends to apply the proceeds of the Subscription Price towards
         the cost of acquiring ZAPCO pursuant to the Merger Agreement.

                           (xvi) CES acknowledges  that this Agreement  contains
         no representations or warranties  concerning ZAPCO and that neither the
         Company nor USE is making any  representations or warranties,  directly
         or indirectly, concerning ZAPCO, its business, or its prospects.

                  B. The Company hereby  represents and warrants to CES that the
         following  are  true,  complete  and  correct  as of the  date  of this
         Agreement:

                  (i) The Company is duly  organized,  validly  existing  and in
         good  standing  under  the laws of the  State of  Delaware  and has all
         requisite  corporate  power and authority to enter into this  Agreement
         and the other Transaction Agreements to which it is a party and perform
         its respective obligations hereunder and thereunder.

                  (ii)  The   execution,   delivery  and   performance   of  the
         Transaction  Agreements  to which  it is a party  (i)  have  been  duly
         authorized by all necessary  corporate action, (ii) do not and will not
         violate,  breach or  constitute  a default  (or an event  which with or
         without  notice and/or lapse of time would  constitute a default) under
         the Company's organizational  documents, any agreement or instrument by
         which  any of them is  bound  or any  law,  regulation,  order,  award,
         judgment, decree, license, permit or instrument to which any of them is
         subject, and (iii) will not result in the creation or imposition of any
         lien,  claim,  charge or other  encumbrance  upon any of the  assets or
         properties of the Company.  Each Transaction Agreement to which it is a
         party is valid and  enforceable  against the Company in accordance with
         its terms,  except as such  enforceability may be limited by applicable
         bankruptcy,  insolvency,  reorganization  and  similar  laws  affecting
         creditors' rights generally and applicable equitable principles.

                  (iii)  The  Company  has  obtained  all  Consents   which  are
         necessary  or  required  on  its  part  for  the  consummation  of  the
         transactions  contemplated by the Transaction Agreements to which it is
         a party.

                  (iv) The Shares, when issued, sold and delivered in accordance
         with the  terms of this  Agreement,  will be duly and  validly  issued,
         fully  paid,  non-assessable  and  free  and  clear  of all  liens  and
         encumbrances.

                  (v)  The  entire  authorized  capital  stock  of  the  Company
         consists of 5,426  shares of Class A Common  Stock,  .01 par value (the
         "Class A Shares")  and 4,574  shares of Class B Common  Stock,  .01 par
         value (the  "Class B Shares")  of which all of the Class A Shares  have
         been  issued to USE and all of the Class B Shares  shall be issued  CES
         pursuant to this Agreement.  There are no outstanding options, warrants
         or  commitments  on the  part  of  the  Company  to  issue  any  equity
         securities of the Company. All of the issued and outstanding Shares are
         duly authorized, validly issued, fully paid and nonassessable, were not
         issued in violation of any law or of any  preemptive or similar  rights
         of any shareholder or other person.

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<PAGE>
                  (vi) The representations and warranties of the Company made by
         it as "Merger Sub" in Article IV of the Merger Agreement as modified or
         qualified by the disclosure schedules attached thereto (the "Disclosure
         Schedules")  delivered by the Company to ZAPCO in  connection  with the
         execution  of the  Merger  Agreement  are hereby  incorporated  by this
         reference   as  if  more  fully  set  forth   herein   and   constitute
         representations made by the Company to CES pursuant to this Agreement.

                 (vii) The Company is not an "electric  utility  company," a
         "holding company" or an  "affiliate" of an "electric  utility  company"
         as such terms are defined by PUHCA.

                  C.  USE  hereby  represents  and  warrants  to  CES  that  the
following are true, complete and correct as of the date of this Agreement:

                  (i)  USE is  duly  organized,  validly  existing  and in  good
         standing  under the laws of the State of Delaware  and,  subject to the
         approval of its  shareholders,  has all requisite  corporate  power and
         authority  to enter  into  this  Agreement  and the  other  Transaction
         Agreements  to  which  it  is  a  party  and  perform  its   respective
         obligations hereunder and thereunder.

                  (ii)  The   execution,   delivery  and   performance   of  the
         Transaction  Agreements  to which  it is a party  (i)  have  been  duly
         authorized by all necessary  corporate  action (other than the approval
         of its  shareholders),  (ii) do not and will  not  violate,  breach  or
         constitute a default (or an event which with or without  notice  and/or
         lapse of time would  constitute a default)  under USE's  organizational
         documents, any agreement or instrument by which any of them is bound or
         any law, regulation, order, award, judgment, decree, license, permit or
         instrument  to which any of them is subject,  and (iii) will not result
         in the  creation  or  imposition  of any lien,  claim,  charge or other
         encumbrance  upon  any  of  the  assets  or  properties  of  USE.  Each
         Transaction  Agreement to which it is a party is valid and  enforceable
         against USE in accordance with its terms, except as such enforceability
         may be limited by applicable bankruptcy, insolvency, reorganization and
         similar laws  affecting  creditors'  rights  generally  and  applicable
         equitable principles.

                  (iii) USE has  obtained all  Consents  which are  necessary or
         required  on  its  part  for  the   consummation  of  the  transactions
         contemplated by the Transaction Agreements to which it is a party.

                  (iv) The  representations  and warranties of USE made by it as
         "Parent" in Article IV of the Merger Agreement as modified or qualified
         by the  Disclosure  Schedules  delivered by USE to ZAPCO in  connection
         with the execution of the Merger  Agreement are hereby  incorporated by
         this  reference  as if more  fully  set  forth  herein  and  constitute
         representations  and  warranties  made by USE to CES  pursuant  to this
         Agreement.

                  (v) USE is not an  "electric  utility  company"  or a "holding
         company" or, to its knowledge,  an "affiliate" of an "electric  utility
         company"  or a  "subsidiary"  of a "holding  company" as such terms are
         defined by PUHCA. USE or its subsidiaries  has duly  self-certified  or

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<PAGE>

         obtained  certification  from the Federal Energy Regulatory  Commission
         that each of its cogeneration or small power production facilities is a
         Qualifying  Facility.  No more than 38% of the equity  interests of any
         such  facility is held by an  electric  utility or  utilities  or by an
         electric  utility  holding  company  or  companies  or any  combination
         thereof.  To USE's  knowledge,  no more than 8% of the voting  power of
         USE's  outstanding  voting  securities are held by an electric  utility
         holding company or companies or any subsidiary thereof.

         3.       Conditions to Closing.

                  A.  Conditions  to  the  Obligations  of  Both  Parties.   The
respective  obligations  of each party to effect  this  Agreement  and the other
transactions  contemplated  herein  shall be subject to the  satisfaction  at or
prior to the  Closing of the  following  conditions,  any or all of which may be
waived, in whole or in part, to the extent permitted by applicable law:

                  (a) No  governmental  entity  or  federal  or  state  court of
competent  jurisdiction  shall have enacted,  issued,  promulgated,  enforced or
entered any  statute,  rule,  regulation,  executive  order,  decree,  judgment,
injunction or other order (whether temporary,  preliminary or permanent), in any
case  which is in effect  and  which  prevents  or  prohibits  the  transactions
contemplated in this Agreement.

                  (b)  All  consents,   approvals  and  authorizations   legally
required to be obtained to consummate the transactions  contemplated hereby have
been obtained.

                  (c) None of the Transaction Documents shall have been modified
or terminated or challenged in court.

                  B.  Conditions  to  the   Obligations  of  the  Company.   The
obligations of the Company to effect the  transactions  contemplated  herein are
also subject to the following conditions:

                  (a)  Each  of  the   representations  and  warranties  of  CES
contained in this Agreement  shall be true and correct in all material  respects
as of the  Closing,  except  that those  representations  and  warranties  which
address  matters only as of a  particular  date shall remain true and correct in
all material  respects as of such date.  CES shall have performed or complied in
all  material  respects  with all  agreements  and  covenants  required  by this
Agreement to be performed or complied with by it on or prior to the Closing.

                  (b) At or prior to the Closing,  all filings  necessary  under
federal and state  securities  laws to permit the  issuance  and delivery of the
Shares in connection  with the Agreement in compliance with such laws shall have
been made, and any  authorizations  in connection  therewith from all applicable
securities regulatory authorities shall have been obtained.

                  (c) All conditions  set forth in Sections 7.01 and 7.02 of the
Merger  Agreement shall  have  been satisfied  except for  (i)  the  conditions
described in Section 7.01(e) and (ii) any  condition set forth  in such Sections
7.01 and 7.02 which is not  satisfied due to a  breach by  the Company  of  any
representation,  warranty, covenant or obligation  contained  in  any  of  the
Transaction Documents (as defined in the Merger Agreement)  to which the Company
is a party.

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<PAGE>

                 (d) The Cinergy Gasco  Purchase and Sale  Agreement  shall have
been executed by all parties thereto, in substantially the form of Exhibit 7.01
(e-2),  and all conditions to closing thereunder, other than  the payment of the
"Purchase Price" (as defined  therein) pursuant to  Section  8.4  therein  shall
have been satisfied or waived by the appropriate party thereunder.

                  C.  Conditions to the  Obligations of CES. The  obligations of
CES to effect  the  transaction  contemplated  herein  are also  subject  to the
following conditions:

                  (a) Each of the  representations and warranties of the Company
and USE  contained in this  Agreement  shall be true and correct in all material
respects as of the Closing,  except that those  representations  and  warranties
which address matters only as of a particular date shall remain true and correct
in all material respects as of such date. Each of the Company and USE shall have
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or prior to
the Closing.

                  (b) All  conditions to closing set forth in Article VII of the
Merger  Agreement except for (i) the conditions  described in Sections  7.01(e),
7.03(j) (to the extent a Change of Control (as defined in the Merger  Agreement)
is caused by Cinergy Corp., Cinergy Investments,  Inc., CHSC, Cinergy Solutions,
Inc., CES or any of their Affiliates  (each a "Cinergy  Entity") and 7.03(l) (to
the  extent  CSHC  fails to  deliver  its  Guarantee  (as  defined in the Merger
Agreement))  and 7.03(n) (to the extent Cinergy Corp.  fails to take the actions
or deliver the documents  necessary to effectuate  the parts of the Hancock Debt
Service Reserve  Arrangement (as defined in the Merger  Agreement) as acceptable
in form and substance to AJG , Cinergy Corp., the Company and USE and applicable
to Cinergy Corp. or (ii) or any condition which is not satisfied due to a breach
by a Cinergy  Entity of any  representation,  warranty,  covenant or  obligation
contained  in  any  of the  Transaction  Documents  (as  defined  in the  Merger
Agreement)  to which it is a party shall have been  satisfied and neither USE or
the  Company  shall  have  waived  or  agreed  to  any  subscription   agreement
modification of such conditions.

                  (c) The Cinergy Gasco Purchase and Sale  Agreement  shall have
been executed by all parties thereto (other than Cinergy Gasco Solutions,  LLC),
in substantially  the form of Exhibit  7.01(e-2),  and all conditions to closing
thereunder,  other than the payment of the "Purchase Price" (as defined therein)
pursuant  to Section  8.4  therein  shall have been  satisfied  or waived by the
appropriate party thereunder.

                  (d) There shall not have been a "Change in Law" (as defined in
the Cinergy Gasco Purchase and Sale Agreement).

                  (e) The Closing (as defined in the Cinergy Gasco  Purchase and
Sale Agreement) shall have occurred by March 31, 2001.

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<PAGE>

                  4. Closing.  The closing (the  "Closing") of the  transactions
         contemplated  by this Agreement  shall take place at the Effective Time
         (as defined in the Merger  Agreement) and place as shall be agreed upon
         by CES and the Company. The parties agree that at Closing:

                           A.       The  Company  shall  deliver to CES  against
                  delivery  of the items  listed in Section 4(B):

                                    (i)     a certificate evidencing the Shares;

                                    (ii)    a  certificate  of Good  Standing of
                  the Company from the  Secretary of State of Delaware;

                                    (iii) a certificate  of the  resolutions  of
                  the Company's  Board of Directors  approving the  transactions
                  contemplated hereby;

                                    (iv) the  Stockholders Agreement annexed
                  hereto as Exhibit A duly executed by USE and the Company;

                                     (v) the  Indemnification  Agreement annexed
                  hereto as Exhibit B duly executed by USE and the Company

                                     (vi) all  agreements referred to in the
                  Merger  Agreement to which any  Cinergy Entity is a party duly
                  executed  by the other parties thereto; and

                                    (vii) such other  instruments  as CES or its
                  counsel shall  reasonably  deem  necessary to  consummate  the
                  transactions contemplated hereby.

                           B.       CES shall  deliver  to the  Company  against
                  delivery  of the items  listed in Section 4(A):

                                    (i)     the Subscription Price;

                                    (ii)    a  certificate  of Good  Standing of
                  CES from the Secretary of State of Delaware;

                                    (iii) a certificate  of the  resolutions  of
                  CES'   Board   of   Directors   approving   the   transactions
                  contemplated hereby; and

                                     (iv)  the  Stockholders  Agreement  annexed
                  hereto as Exhibit A duly executed by CES; and

                                    (v)     the Indemnification Agreement duly
                  executed by CES

                                    (vi)  all  agreements  referred  to  in  the
                  Merger  Agreement to which any Cinergy  Entity is a party duly
                  executed by the applicable Cinergy Entity; and

                                    (vii) such other  instruments as the Company
                  or its counsel shall  reasonably  deem necessary to consummate
                  the transactions contemplated hereby.

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<PAGE>
                           C. All proceedings  taken and all documents  executed
                  and delivered by the parties at the Closing shall be deemed to
                  have been taken and executed simultaneously, and no proceeding
                  shall be deemed taken nor any  document  executed or delivered
                  until all have been taken, executed and delivered.

                  5. Further  Assurances.  The parties  hereto shall execute and
         deliver  such  agreements  and  arrangements  which  are  customary  in
         connection  with  transactions of this type. In addition to the actions
         specifically  provided  for  elsewhere in this  Agreement,  each of the
         parties  hereto  shall  use its best  efforts  to take,  or cause to be
         taken,  all  actions,  and to do,  or  cause to be  done,  all  things,
         reasonably  necessary,  proper  or  advisable  under  applicable  laws,
         regulations  and  agreements  to  effectuate  and  make  effective  the
         transactions  contemplated  by  this  Agreement,   including,   without
         limitation,   using  its  best  efforts  to  obtain  the  consents  and
         approvals,  to enter  into any  amendatory  agreements  and to make the
         filings and applications  necessary or desirable in order to effectuate
         the transactions contemplated by this Agreement.

                  6.       Access to Information

                           A. Cooperation with Respect to Government Filings and
         Reports.  CES and the Company agree to provide the other party (without
         cost to such other party) with access during reasonable  business hours
         and  for  a  reasonable  business  purpose  and  such  cooperation  and
         information,  including,  but  not  limited  to,  all  records,  books,
         contracts,  instruments,  computer  data and other data,  including all
         historical  financial and tax information,  and personnel with relevant
         knowledge of such  information,  as may be reasonably  requested by the
         other in connection  with the  preparation  or filing of any government
         report or other government filing, contemplated by this Agreement. Such
         cooperation and information shall include, without limitation, promptly
         forwarding   copies  of   appropriate   notices   and  forms  or  other
         communications received from or sent to any government authority to the
         appropriate  party.  Each party shall make its employees and facilities
         available  during normal business hours and on reasonable  prior notice
         shall  provide  explanation  of any documents or  information  provided
         hereunder.

                           B.  Cooperation  with  Confidentiality.  CES  and the
         Company  agree to use their  reasonable  best  efforts to  protect  the
         confidentiality   of  all   non-public   information,   attorney-client
         privileged  information,  attorney work product  information  and other
         privileged  information  concerning  the other party which is disclosed
         pursuant to this Agreement and neither party shall waive any claim that
         information  is  privileged  without the  written  consent of the other
         party.

                  7.       Hancock Debt Service Reserve Arrange ment
         CES shall  cause  Cinergy  Corp.  to take all  actions  and deliver all
documents  necessary to effectuate the parts of the Hancock Debt Service Reserve
Arrangement applicable to Cinergy Corp. acceptable in form and substance to AJG,
Cinergy Corp., the Company and USE.

                                       9
<PAGE>
                  8.       Miscellaneous.

                           A. Survival of Representations and Warranties. All of
         the  representations  or  warranties  set  forth in  Article  2 of this
         Agreement  shall  survive the  Closing for a period of eighteen  months
         following   the   Effective   Time,   subject   to  the  terms  of  the
         Indemnification Agreement.

                           B.  Notices.  All  notices  and other  communications
         given or made  pursuant  hereto  shall be sent by  reputable  overnight
         courier  next day  delivery and shall be deemed to have been duly given
         or made as of the  date so sent for  delivery,  to the  parties  at the
         following  addresses  (or at such other address for a party as shall be
         specified by like changes of address):

                           (a)      If to the Company and USE:

                           U.S. Energy Systems, Inc.
                           One North Lexington Avenue
                           4th Floor
                           White Plains, New York  10601
                           Attention: Goran Mornhed, President and Chief
                           Operating Officer
                           Fax: (914) 271-5315

                           With a copy to:

                           U.S. Energy Systems, Inc.
                           One North Lexington Avenue
                           4th Floor
                           White Plains, New York  10601
                           Attention: Barbara Farr, Esq., General Counsel
                           Fax: (718) 832-0263

                           (b)      if to CES:

                           Cinergy Energy Solutions, Inc.
                           c/o Cinergy Solutions, Inc.
                           1000 East Main Street
                           Plainfield, IN  46168
                           Attention: M. Stephen Harkness, President and Chief
                           Operating Officer
                           Facsimile: 317-838-2090

                           with a copy to:

                           Cinergy Corp.
                           221 East Fourth Street
                           Cincinnati, Ohio  45201
                           Attention: Jerome A. Vennemann, Esq.
                           Facsimile: 513-287-1363

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<PAGE>
                           C.  Headings.  The headings  contained  in  this
         Agreement are for reference purposes only and shall not affect  in any
         way the meaning or interpretation of this Agreement.

                           D.  Severability.  The  provisions of this  Agreement
         shall be deemed severable and the invalidity or unenforceability of any
         provision shall not affect the validity and enforceability of the other
         provisions  hereof.  If  any  provision  of  this  Agreement,   or  the
         application  thereof  to any person or entity or any  circumstance,  is
         invalid or unenforceable,  (a) a suitable and equitable provision shall
         be  substituted  therefor in order to carry out, so far as may be valid
         and   enforceable,   the  intent  and  purpose  of  such   invalid  and
         unenforceable provision and (b) the remainder of this Agreement and the
         application   of  such   provision  to  other   persons,   entities  or
         circumstances   shall   not  be   affected   by  such   invalidity   or
         unenforceability,  nor shall such invalidity or unenforceability affect
         the validity or  enforceability  of such provision,  or the application
         thereof, in any other jurisdiction.

                           E. Entire Agreement.  This Agreement,  the agreements
         referenced  in the Merger  Agreement  to which USE, the Company and any
         Cinergy Entity are all parties, and the Disclosure Schedules constitute
         the entire  agreement of the parties and supersede all prior agreements
         and undertakings, both written and oral, between the parties, or any of
         them,  with  respect  to the  subject  matter  hereof  and,  except  as
         otherwise  expressly  provided herein,  are not intended to confer upon
         any other person any rights or remedies hereunder.

                           F.       Mutual  Drafting.  Each party hereto has
         participated  in the drafting of this Agreement, which each party
         acknowledges is  the  result of  extensive negotiations  between  the
         parties.

                           G. Governing  Law. This  Agreement  shall be governed
         by,  and  construed  in  accordance  with,  the  Laws of the  State  of
         Delaware,  regardless  of the laws that might  otherwise  govern  under
         applicable choice of law principles.

                           H.       Reserved

                           I.  Expenses.  Except as otherwise  provided  herein,
         each party shall bear its own fees and expenses  incurred in connection
         with,  relating  to or  arising  out of the  negotiation,  preparation,
         execution,   delivery  and  performance  of  this  Agreement,  and  the
         effectuation  of  the  transactions   contemplated  hereby,  including,
         without limitation, financial advisors',  attorneys',  accountants' and
         other professional fees and expenses.

                           J. Assignment;  No Third Party Rights; Successors and
         Assigns. This Agreement shall not be assigned by any party hereto or by
         operation  of law or  otherwise  without the consent of the other party

                                       11
<PAGE>

         hereto.  This  Agreement  shall be binding upon and inure solely to the
         benefit of each party hereto and its successors and permitted  assigns,
         and nothing in this  Agreement,  express or implied,  is intended to or
         shall confer upon any other Person any rights,  benefits or remedies of
         any nature whatsoever under or by reason of this Agreement.

                           K. No  Consequential  Damages.  Except  as  otherwise
         provided in this  Agreement,  it is agreed that no party hereto will be
         responsible  to the others for any  indirect,  special,  incidental  or
         consequential  loss or damage  whatsoever  (including  lost profits and
         opportunity costs) arising out of this Agreement.

                           L.  Counterparts.  This  Agreement may be executed in
         one or  more  counterparts,  and by the  different  parties  hereto  in
         separate  counterparts,  each of which when executed shall be deemed to
         be an original but all of which taken together shall constitute one and
         the same agreement.

                                       12

<PAGE>


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


                                CINERGY ENERGY SOLUTIONS, INC.


                                By:   /s/  M. Stephen Harkness
                                    --------------------------------------------
                                    Name:  M. Stephen Harkness
                                    Title: President and Chief Operating Officer


                                USE ACQUISITION CORP.


                                By:  /s/ Goran Mornhed
                                    --------------------------------------------
                                    Name:
                                    Title:


                                U.S. ENERGY SYSTEMS, INC.


                                By: /s/ Goran Mornhed
                                   ----------------------------------
                                Name:
                                Title:


                                     13