AMENDMENT NO. 1 TO ESCROW AGREEMENT


                  THIS AMENDMENT NO. 1 to the Escrow Agreement is made as of the
[    ] day of May 2001 (as supplemented or modified from time to time, this
"Agreement") by and among Stephen Rosenberg, AJG Financial Services, Inc.,
through its Vice-President, General Counsel as agent (the "Major Shareholder
Agent") for Bernard J. Zahren, Finova Mezzanine Capital Corp., AJG Financial
Services, Inc., Environmental Opportunities Fund (by itself and as successor to
Environmental Opportunities Fund Cayman), Fredric Rose, M&R  Associates, Martin
F. Laughlin, Richard C. Augustine and Michael J. Carolan (each, an "Initial
Major Shareholder"), U.S. Energy Systems, Inc., a Delaware corporation ("USE"),
and USE Acquisition Corp. a Delaware corporation (the "Sub" and together with
USE, the "USE Parties"), Cinergy Energy Solutions, Inc., a Delaware corporation
("CES" and together with the USE Parties, the "Beneficiaries"), and Tannenbaum
Helpern Syracuse & Hirschtritt LLP having an office at 900 Third Ave., New York,
New York, 10022 (the "Escrow Agent"). Unless indicated otherwise, capitalized
terms shall have the same meanings herein as they have in the Escrow Agreement
(as defined below).


                              W I T N E S S E T H:

                  WHEREAS, the parties hereto and the Initial Major Shareholders
have previously entered into that certain Escrow Agreement dated as of November
28, 2000 (the "Escrow Agreement");

                  WHEREAS, the parties hereto and the Initial Major Shareholders
wish to add Stephen Rosenberg as a "Major Shareholder" as such term is used in
the Escrow Agreement;

                  WHEREAS, the parties hereto now wish to amend the Escrow
                  Agreement;

                  NOW, THEREFORE, in consideration of $10.00 and other
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

1.                    The prefatory paragraph and the signature page of the
                      Escrow Agreement are amended to include Stephen Rosenberg
                      as a "Major Shareholder." By his signature hereto, Stephen
                      Rosenberg represents and warrants that he has read the
                      Escrow Agreement, as amended by this Agreement, and agrees
                      to be bound by its terms as a Major Shareholder as if he
                      were an original signatory thereto.


2.                    The first sentence of Section 2 of the Escrow Agreement is
                      hereby amended by deleting the existing sentence in its
                      entirety and inserting in its place the following
                      sentence:


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<PAGE>
                      Escrow Agent agrees to hold and disburse (i) cash, shares
                      of USE's Series C Preferred Stock ("Preferred Stock") and
                      shares of USE's common stock ("Common Stock" and together
                      with the Preferred Stock, the "Stock") delivered to it
                      pursuant to the Merger Agreement on account of the
                      possibility of a post-closing adjustment to the Merger
                      Consideration (the "Working Capital Escrow Fund"), (ii)
                      cash and shares of Stock delivered to it pursuant to the
                      Merger Agreement on account of the obligations of the
                      Major Shareholders pursuant to the Indemnification
                      Agreement other than pursuant to Sections 3(a)(xvi)-(xix)
                      thereof (the "Indemnification Escrow Fund"), and (iii)
                      cash delivered to it pursuant to the Merger Agreement on
                      account of the obligations of the Major Shareholders
                      pursuant to Sections 3(a)(xvi)-(xix) of the
                      Indemnification Agreement (the "Additional Indemnification
                      Escrow Fund" and together with the Indemnification Escrow
                      Fund and the Working Capital Escrow Fund, the "Escrow
                      Funds") pursuant to the terms hereof.



3.       Section 3(c) of the Escrow Agreement is hereby amended by deleting the
         existing section in its entirety and inserting in its place the
         section:


                  (c) The parties acknowledge that the Indemnification Escrow
Fund shall serve as a source of funding for amounts owing by the Major
Shareholders to the Beneficiaries pursuant to Section 3(a) of the
Indemnification Agreement, other than pursuant to Sections 3(a)(xvi)-(xix)
thereof ("Claims"). If any Beneficiary shall request a disbursement from the
Indemnification Escrow Fund associated with any Claim, it shall give notice of
such request (which notice shall be executed by such Beneficiary) to the Escrow
Agent and the Major Shareholders, which notice shall set forth the amount
requested, the basis for such request, and reasonable documentation to support
such request (such notice being substantially in the form of Exhibit C hereto).
The Escrow Agent shall disburse the amount requested within 10 days of its
receipt of the notice in the event the Escrow Agent shall not have received a
notice of objection from the Major Shareholder Agent within such period. In the
event the Escrow Agent shall receive a notice of objection from the Major
Shareholder Agent within such period, it shall not disburse the amount requested
unless and until it shall have received (i) the joint written notice of the
Major Shareholder Agent and such Beneficiary setting forth the joint direction
of such parties (such notice being substantially in the form of Exhibit D
hereto), (ii) a written instrument representing a final and non-appealable order
or similar direction with respect to the disposition of such amount issued by
the arbitrator or arbitration forum, or (iii) a certified copy of a final and
non-appealable judgment of a court of competent jurisdiction directing the
disbursement of such funds; the Escrow Agent shall also be entitled, in its sole
discretion, to deposit such Indemnification Escrow Fund with the clerk of the
court in which any litigation between the parties is pending, or with the clerk
of an appropriate court in New York, New York. The Escrow Agent shall make
disbursements in cash, Common Stock or Preferred Stock from the Indemnification
Escrow Fund in proportion to the aggregate amount of cash (including any
investments made pursuant to Section 2 hereof and the proceeds thereof), Common

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<PAGE>

Stock and Preferred Stock in the Indemnification Escrow Fund, with the Stock
which valued according to the Merger Consideration Value.

4.       Section 3(d) of the Escrow Agreement is hereby amended by deleting the
         existing section in its entirety and inserting in its place the
         following section:


                      (d) At any time following the Release Date, the Major
                      Shareholder Agent may, at its option, give notice to the
                      Escrow Agent and the Beneficiaries that the Escrow Agent
                      shall disburse to the Major Shareholder Agent the
                      Non-Disputed Portion (as defined below) of the
                      Indemnification Escrow Fund. In the event the Escrow Agent
                      shall not have received a notice of objection from either
                      Beneficiary within 10 days after delivery of such notice,
                      it shall be required to disburse the Non-Disputed Portion
                      to the Major Shareholders in accordance with the
                      instructions contained in the Major Shareholder Agent's
                      notification and the Indemnification Escrow Fund shall
                      terminate (and, if the Additional Indemnification Escrow
                      Fund has also terminated, this Agreement shall terminate).
                      In the event that the Escrow Agent shall receive a notice
                      of objection from either Beneficiary within such period,
                      it shall not disburse any portion of the Indemnification
                      Escrow Fund and shall disburse the Indemnification Escrow
                      Fund only in accordance with the provisions of the fourth
                      sentence of Section 3(c) hereof. The "Non-Disputed
                      Portion" equals the Indemnification Escrow Fund less the
                      product of (i) a fraction, the numerator of which is (A)
                      the value of USE Shares in the Indemnification Escrow Fund
                      (valued in accordance with the definition of Merger
                      Consideration Value) plus the amount of cash in the
                      Indemnification Escrow Fund, and the denominator of which
                      is (B) the value of USE Shares in the Indemnification
                      Escrow Fund (valued in accordance with the definition of
                      USE Shares) plus the amount of cash in the Indemnification
                      Escrow Fund plus the Contingent Merger Payment, as
                      adjusted through such time and (ii) the amount at issue
                      (as reasonably determined by the Beneficiary that provided
                      such notice of Claim), including interest and fees
                      (including legal fees and expenses) (the "Amount at
                      Issue"), under the Claims that have been set forth in
                      notices provided under Section 3(c) of this Agreement and
                      have not been settled and paid in accordance with Section
                      3(c); each Beneficiary agrees that upon a request of a
                      Major Shareholder Agent following the Release Date, it
                      shall promptly prepare with respect to each Claim that has
                      been set forth in notices provided by it under Section
                      3(c) of this Agreement and has not been settled and paid
                      in accordance with Section 3(c), a statement setting forth
                      the Amount at Issue. The Escrow Agent shall make
                      disbursements of cash, Common Stock and Preferred Stock
                      from the Non-Disputed Portion of the Indemnification
                      Escrow Fund in proportion to the aggregate amount of cash
                      (including any investments made pursuant to Section 2
                      hereof and the proceeds thereof), Common Stock and
                      Preferred Stock in the Indemnification Escrow Fund, with
                      the Stock being valued according to the Merger
                      Consideration Value.

                                       3
<PAGE>
                                    At any time following the Release Date that
                      all Claims that have been set forth in notices provided
                      under Sections 3(c) of the Agreement have been settled and
                      paid in accordance with the provisions of Section 3(c), no
                      such Claims remain outstanding, the Major Shareholder
                      Agent may, at its option, give notice to the Escrow Agent
                      and the Beneficiaries that all of such conditions have
                      been fulfilled. In the event the Escrow Agent shall not
                      have received a notice of objection from either
                      Beneficiary within 10 days after delivery of such notice,
                      it shall be required to disburse all amounts and Shares
                      then remaining in the Indemnification Escrow Fund to the
                      Major Shareholders in accordance with the instructions
                      contained in the Major Shareholder Agent's notification
                      and the Indemnification Escrow Fund shall terminate (and,
                      if the Additional Indemnification Escrow Fund has also
                      terminated, this Agreement shall terminate). In the event
                      that the Escrow Agent shall receive a notice of objection
                      from either Beneficiary within such period, it shall not
                      disburse any portion of the Indemnification Escrow Fund
                      and shall disburse the Indemnification Escrow Fund only in
                      accordance with the provisions of the fourth sentence of
                      Section 3(c) hereof. The "Release Date" shall be the date
                      eighteen months following the Closing Date.

5.       Section 3 of the Escrow Agreement is hereby amended by inserting at the
         end thereof the following subsection:

                      (f) The parties acknowledge that the Additional
                      Indemnification Escrow Fund shall serve as a source of
                      funding for amounts owing by the Major Shareholders to the
                      Beneficiaries pursuant to Section 3(a)(xvi)-(xix) of the
                      Indemnification Agreement ("Additional Claims"). If any
                      Beneficiary shall request a disbursement from the
                      Additional Indemnification Escrow Fund associated with any
                      Additional Claim, it shall give notice of such request
                      (which notice shall be executed by such Beneficiary) to
                      the Escrow Agent and the Major Shareholders, which notice
                      shall set forth the amount requested, the basis for such
                      request, and reasonable documentation to support such
                      request (such notice being substantially in the form of
                      Exhibit E hereto). The Escrow Agent shall disburse the
                      amount requested within 10 days of its receipt of the
                      notice in the event the Escrow Agent shall not have
                      received a notice of objection from the Major Shareholder
                      Agent within such period. In the event the Escrow Agent
                      shall receive a notice of objection from the Major
                      Shareholder Agent within such period, it shall not
                      disburse the amount requested unless and until it shall
                      have received (i) the joint written notice of the Major
                      Shareholder Agent and such Beneficiary setting forth the
                      joint direction of such parties (such notice being
                      substantially in the form of Exhibit F hereto), (ii) a
                      written instrument representing a final and non-appealable
                      order or similar direction with respect to the disposition
                      of such amount issued by the arbitrator or arbitration
                      forum, or (iii) a certified copy of a final and
                      non-appealable judgment of a court of competent
                      jurisdiction directing the disbursement of such funds; the
                      Escrow Agent shall also be entitled, in its sole

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<PAGE>
                      discretion, to deposit such Additional Indemnification
                      Escrow Funds with the clerk of the court in which any
                      litigation between the parties is pending, or with the
                      clerk of an appropriate court in New York, New York.


                           At any time following the Additional Escrow Fund
                      Release Date, the Major Shareholder Agent may, at its
                      option, give notice to the Escrow Agent and the
                      Beneficiaries that the Escrow Agent shall disburse to the
                      Major Shareholder Agent the Additional Non-Disputed
                      Portion (as defined below) of the Additional
                      Indemnification Escrow Fund. In the event the Escrow Agent
                      shall not have received a notice of objection from either
                      Beneficiary within 10 days after delivery of such notice,
                      it shall be required to disburse the Additional
                      Non-Disputed Portion to the Major Shareholders in
                      accordance with the instructions contained in the Major
                      Shareholder Agent's notification and the Additional
                      Indemnification Escrow Fund shall terminate (and, if the
                      Indemnification Escrow Fund has also terminated, this
                      Agreement shall terminate). In the event that the Escrow
                      Agent shall receive a notice of objection from either
                      Beneficiary within such period, it shall not disburse any
                      portion of the Additional Indemnification Escrow Fund and
                      shall disburse the Additional Indemnification Escrow Fund
                      only in accordance with the provisions of the fourth
                      sentence of Section 3(f) hereof. The "Additional
                      Non-Disputed Portion" equals the amount of cash in the
                      Additional Indemnification Escrow Fund less the amount at
                      issue (as reasonably determined by the Beneficiary that
                      provided such notice of Additional Claim), including
                      interest and fees (including legal fees and expenses) (the
                      "Additional Amount at Issue"), under the Additional Claims
                      that have been set forth in notices provided under Section
                      3(f) of this Agreement and have not been settled and paid
                      in accordance with Section 3(f); each Beneficiary agrees
                      that upon a request of a Major Shareholder Agent following
                      the Additional Escrow Fund Release Date, it shall promptly
                      prepare with respect to each Additional Claim that has
                      been set forth in notices provided by it under Section
                      3(f) of this Agreement and has not been settled and paid
                      in accordance with Section 3(f), a statement setting forth
                      the Additional Amount at Issue.

                      At any time following the Additional Escrow Fund Release
                      Date (as defined below) that all Claims that have been set
                      forth in notices provided under Sections 3(f) of this
                      Agreement have been settled and paid in accordance with
                      the provisions of this Section 3(f), no such Additional
                      Claims remain outstanding, the Major Shareholder Agent
                      may, at its option, give notice to the Escrow Agent and
                      the Beneficiaries that all of such conditions have been

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<PAGE>
                      fulfilled. In the event the Escrow Agent shall not have
                      received a notice of objection from either Beneficiary
                      within 10 days after delivery of such notice, it shall be
                      required to disburse all amounts and Shares then remaining
                      in the Additional Indemnification Escrow Fund to the Major
                      Shareholders in accordance with the instructions contained
                      in the Major Shareholder Agent's notification and the
                      Additional Indemnification Escrow Fund shall terminate
                      (and, if the Indemnification Escrow Fund has also
                      terminated, this Agreement shall terminate). In the event
                      that the Escrow Agent shall receive a notice of objection
                      from either Beneficiary within such period, it shall not
                      disburse any portion of the Additional Indemnification
                      Escrow Fund and shall disburse the Additional
                      Indemnification Escrow Fund only in accordance with the
                      provisions of the fourth sentence of Section 3(f) hereof.
                      The "Additional Escrow Fund Release Date" shall be the
                      earliest date of any of the following events: (i) the date
                      that the Condemnation Insurance (as defined in Amendment
                      No. 1 to the Indemnification Agreement) has been obtained,
                      (ii) the indebtedness described in the ABB Loan Agreement
                      has been paid in full, (iii) the requirement in the ABB
                      Loan Agreement for Condemnation Insurance and the related
                      holdback provisions in Section 4.4 of the ABB Loan
                      Agreement have been permanently waived or eliminated, or
                      (iv) any self-insurance arrangement with ABB replacing the
                      Condemnation Insurance requirement has been implemented
                      and the holdback provisions in Section 4.4 of the ABB Loan
                      Agreement relating to the Condemnation Insurance have been
                      eliminated.

                                    (g) In the event that, at any time prior to
                           the Release Date, Zapco is required to deposit
                           $200,000 to fund the Debt Service Reserve Account
                           (the "Reserve Account") described in Section 3.02(f)
                           of the Third Supplemental Indenture of Trust and
                           Security Agreement, dated as of April 30, 2001, among
                           Zapco, certain of its subsidiaries and The Chase
                           Manhattan Bank, as Trustee, then the Escrow Agent
                           shall promptly transfer $200,000 in cash from the
                           Indemnification Escrow Fund to the Reserve Account.
                           If such $200,000 funding (the "Reserve Funding") is
                           released from the Reserve Account before the later of
                           (i) the Release Date and (ii) the resolution of all
                           Claims outstanding on the Release Date, the Reserve
                           Funding shall be returned to the Escrow Agent so that
                           it can be deposited in the Indemnification Escrow
                           Fund. If it is subsequently released from the
                           Indemnification Escrow Fund pursuant to this
                           Agreement, the Reserve Funding shall be distributed
                           to the Major Shareholders in proportion to the
                           respective amounts they contributed to the Reserve
                           Account. In the event all or part of the initial
                           Reserve Funding is drawn upon by the indenture
                           trustee, Zapco shall promptly replenish the Reserve
                           Account in the amount of any such draw (but in no
                           event by more than $200,000 with respect to any
                           single drawing). The disposition of such replenished
                           funds shall be governed by the second sentence of
                           this Section 3(g) as if such funds had been part of
                           the initial Reserve Funding. With respect to such
                           disposition, in no event shall the amount distributed

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<PAGE>
                           to the Major Shareholders under the second section of
                           this Section 3(g) exceed $200,000 in the aggregate.



6.                    The Escrow Agreement is hereby amended by inserting at the
                      end thereof Exhibit E and Exhibit F in the form annexed
                      hereto as Annex A.

7.                    Except as amended hereby, the Escrow Agreement is hereby
                      ratified and confirmed and, as so amended, remains in full
                      force and effect on the date hereof.


                  IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be Executed as of the date first written above.


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<PAGE>


                                  MAJOR SHAREHOLDER AGENT:
                                  AJG FINANCIAL SERVICES, INC.

                                  /s/ John C. Rosengren
                                      ---------------------------------------
                                      Name:  John C. Rosengren
                                      Title:  Vice President and General Counsel
                                      For:  AJG Financial Services, Inc.


                                 CINERGY ENERGY SOLUTIONS, INC.:


                                  /s/ Donna L. Robichaud
                                      ------------------------
                                      Name:  Donna L. Robichaud
                                      Title: Vice President


                                   U.S. ENERGY SYSTEMS, INC.:



                                   /s/ Goran Morhned
                                      ----------------------
                                      Name: Goran Mornhed
                                      Title: President and Chief Operating
                                             Counsel


                                    USE ACQUISITION CORP.:


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



                                    /s/Stephen Rosenberg
                                       -----------------
                                       Stephen Rosenberg

                                       8


<PAGE>

                                   ESCROW AGENT:

                                   TANNENBAUM HELPERN SYRACUSE & HIRSCHTRITT LLP



                                    By: ________________________________
                                        A Member of the Firm


                                      9
                                                                  ANNEX A
<PAGE>




                                    Exhibit E
                           FORM OF DISBURSEMENT NOTICE
                                   CERTIFICATE


          This  certificate  is being issued  pursuant to Section  3(f) of that
certain  Escrow  Agreement  (as  amended,  the "Escrow Agreement")  dated as of
November 28, 2000  by and among  Bernard J. Zahren, Finova  Mezzanine  Capital
Corp.,  AJG Financial  Services, Inc.,  Environmental  Opportunities Fund,
Environmental  Opportunities Fund Cayman, Frederic Rose, M&R Associates,  Martin
F. Laughlin, Richard C. Augustine and Michael J. Carolan (each, an "Major
Shareholder"),  AJG Financial Services,  Inc., through its Vice-President,
General  Counsel as agent (the "Major  Shareholder  Agent") for the Major
Shareholders,  Cinergy  Energy  Solutions,  Inc., a Delaware corporation ("CES")
,  U.S. Energy Systems,  Inc., a Delaware corporation ("USE"), and USE
Acquisition Corp. a Delaware corporation (the "Sub" and together with USE and
CES, the  "Beneficiaries"),  and  Tannenbaum Helpern  Syracuse & Hirschtritt LLP
as Escrow Agent (the "Escrow Agent").  Terms not defined in this  certificate
shall have the meanings set forth in the Escrow  Agreement.  The undersigned,
one of the Beneficiaries, hereby certifies that:

         1.       The  undersigned is requesting  the Escrow Agent release the
amount of  $_______from  the Additional  Indemnification Escrow Fund.


         2.       The  undersigned  is requesting  the amount in Paragraph 1
above on account of [brief  description of the claim] (the "Claim");

         3.       Attached hereto is documentation which supports the amount of
 the Claim; and

         4.       A copy of this  Certificate,  including all  attachments,  has
been sent to each Major  Shareholder in the manner set forth in the Escrow
Agreement.

         IN WITNESS  WHEREOF,  the  undersigned  has executed and delivered this
 Certificate  as of the  ________day  of  ___________________.


                                     [                             ]

                                       _____________________________
                                       Name:
                                       Title:

                                       10
<PAGE>

                                  Exhibit F
                        FORM OF JOINT DISBURSEMENT NOTICE
                                   CERTIFICATE

                   This certificate is being issued pursuant to Section 3(f) of
that certain Escrow Agreement (as amended,  the "Escrow Agreement")  dated as of
November 28, 2000 by and among Bernard J.Zahren, Finova Mezzanine Capital Corp.,
AJG Financial  Services, Inc.,  Environmental  Opportunities Fund, Environmental
Opportunities Fund Cayman, Frederic Rose, M&R Associates,  Martin F. Laughlin,
Richard C. Augustine and Michael J. Carolan (each, an "Major Shareholder"),  AJG
Financial Services,  Inc., through its Vice-President, General  Counsel as agent
(the "Major  Shareholder  Agent") for the Major  Shareholders,  Cinergy  Energy
Solutions,  Inc., a Delaware corporation ("CES"),  U.S. Energy Systems,  Inc., a
Delaware corporation ("USE"), and USE Acquisition Corp. a Delaware corporation
(the "Sub" and together with USE and CES, the  "Beneficiaries"), and Tannenbaum
Helpern  Syracuse & Hirschtritt  LLP as Escrow Agent (the "Escrow  Agent").
Terms not defined in this  certificate  shall have the meanings set forth in the
Escrow  Agreement.  The undersigned each hereby certify that:

         1. On __________, ___ one of the Beneficiaries (the "Requesting Party")
filed a certificate (a copy of which was attached to this certificate with the
Escrow Agent) (the "Disputed Certificate") with the Escrow Agent and the other
parties required under Section 3(c) of the Escrow Agreement.

         2.       The Major  Shareholder  Agent disputed an element of the
Disputed  Certificate in accordance with the above provision of the Escrow
Agreement.

         3. The parties hereto are now jointly requesting the Escrow Agent
release the amount of $_______ from the Additional Indemnification Escrow Fund
to the Requesting Party as the agreed-to payment with respect to the Disputed
Certificate.

         IN WITNESS WHEREOF, the Major Shareholder Agent and the Requesting
Party have executed and delivered this Certificate as of the ________day of
___________ ________.


                                      [                             ]
                                        ____________________________
                                        Name:
                                        Title:

                                        MAJOR SHAREHOLDER AGENT:

                                        ___________________________
                                        Name:
                                        Title:

                                       11