PERFORMANCE GUARANTY OF U.S. ENERGY SYSTEMS, INC.

         This  Performance  Guaranty,  dated as of November 28, 2000, is made by
U.S. ENERGY SYSTEMS,  INC., a Delaware  corporation (the  "Guarantor),  for the
benefit of the  stockholders  of Zapco (as  defined  below) as of the  Effective
Date, acting solely through their representative,  AJG Financial Services,  Inc.
and  specifically,  its Vice  President - General  Counsel,  as the  Shareholder
Representative (the "Representative" or the "Counterparty.")

         WHEREAS,  the  Guarantor,   Zahren  Alternative  Power  Corporation,  a
Delaware corporation ("Zapco") and USE Acquisition Corp., a Delaware corporation
and a  subsidiary  of  Guarantor  ("Merger  Sub"),  have entered into or will be
entering into the Agreement  and Plan of  Reorganization  and Merger dated as of
the date hereof (the "Agreement").

         NOW,  THEREFORE,  in  consideration  of, and as an inducement  for, the
Counterparty  entering into the Agreement,  the Guarantor  hereby  covenants and
agrees as follows  (capitalized  terms used without being  defined  herein shall
have the meanings ascribed to such terms by the Agreement):

1.       GUARANTY OF OBLIGATIONS

The  Guarantor  hereby   unconditionally  and  irrevocably   guarantees  to  the
Counterparty,  the due and punctual  performance  of, and  compliance  with, the
obligation to make the Contingent Merger Payment;  provided,  however,  that the
Guarantor's  obligations with respect to the Contingent Merger Payment shall not
exceed 62.5% of (a) the Contingent  Merger Payment less (b) any reduction to the
Contingent  Merger  Payment  pursuant  to  the  Indemnification  Agreement  (the
"Obligations"). Such guaranty will not terminate until the Obligations have been
performed  in  full  by  Merger  Sub  or  performance  has  been  waived  by the
Counterparty.

2.       OBLIGATIONS ABSOLUTE

The  obligations of the Guarantor  hereunder are primary and not as surety only,
and the Guarantor  expressly waives any legal obligation,  duty or necessity for
the Counterparty to proceed first against Merger Sub or to exhaust any remedy it
may have against Merger Sub,  provided,  however,  that the Counterparty  agrees
that it will not proceed to enforce this guaranty directly against the Guarantor
until after first making  written demand for  performance on Merger Sub,  unless
such written  demand would violate any automatic  stay  applicable to Merger Sub
pursuant to any bankruptcy proceeding relating to Merger Sub.

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Upon the failure by Merger Sub to fulfill any of the Obligations,  the Guarantor
shall  forthwith  assume and fulfill such  Obligations.  The  Obligations of the
Guarantor hereunder:  (i) shall not be extinguished as a result of any change in
the  existence,  structure or ownership of Merger Sub; (ii) shall continue to be
effective or be  reinstated,  as the case may be, if, at any time, any of Merger
Sub's payments must be restored or returned by the Counterparty to Merger Sub or
its  successors  or to a  custodian,  receiver or a trustee in  bankruptcy  as a
result of any insolvency, bankruptcy, reorganization or other similar proceeding
affecting  Merger Sub or its assets;  and (iii) shall not be  extinguished by an
assignment by Merger Sub of the Agreement to an affiliate of Merger Sub.

The  obligations  of  the  Guarantor  hereunder  shall  not  be  subject  to any
counterclaim,  set off,  deduction or defense based upon any claim the Guarantor
or Merger Sub may have against the Counterparty or any of its affiliates, except
for those arising under the  Agreement or the  Indemnification  Agreement or any
one or more of the  foregoing,  and shall  remain in full force and effect until
the  Obligations of Merger Sub have been  performed in full,  without regard to,
and  shall  not  be  released,  discharged  or  in  any  way  affected  by,  any
circumstance  or condition,  except as set forth herein.  All of the Obligations
shall  conclusively  be deemed to have been  created,  contracted or incurred in
reliance upon this Guaranty.

3.       REPRESENTATIONS AND WARRANTIES OF GUARANTOR

The Guarantor hereby  covenants,  represents and warrants to the Counterparty as
follows:

         a.       The  Guarantor is a  corporation  duly  incorporated,  validly
                  existing  and  in  good   standing   under  the  laws  of  its
                  jurisdiction  of  incorporation,  with full corporate power to
                  enter  into  this  Guaranty  and to  perform  its  obligations
                  hereunder.

         b.       The  execution,  delivery and  performance by the Guarantor of
                  this Guaranty are within the corporate  power of the Guarantor
                  and have  been  duly  authorized  by all  necessary  corporate
                  action of the Guarantor.

         c.       The  execution,  delivery and  performance by the Guarantor of
                  this  Guaranty  does not and will not conflict with or violate
                  any law, judgment, order or decree binding on the Guarantor or
                  the Certificate of Incorporation or Bylaws of the Guarantor or
                  any contract or agreement to which the Guarantor is a party or
                  by which it is bound.

         d.       No additional  consent of any person, and no notice to, filing
                  or registration  with, or  authorization,  consent or approval
                  of, any governmental,  regulatory or self-regulatory agency is
                  necessary or required to be made or obtained by the  Guarantor
                  in connection with the execution and delivery by the Guarantor
                  of this  Guaranty or the  performance  by the Guarantor of its
                  obligations hereunder.

         e.       This Guaranty  constitutes  a valid and binding  obligation of
                  the Guarantor, enforceable against the Guarantor in accordance
                  with its terms.

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         f.       There is no litigation,  arbitration proceeding,  governmental
                  investigation,  citation or action of any kind  pending or, to
                  the knowledge or the Guarantor, proposed or threatened against
                  the  Guarantor  or  relating  to  the   business,   assets  or
                  properties of the Guarantor  which,  if adversely  determined,
                  would  materially  and  adversely  affect  the  ability of the
                  Guarantor to perform its obligations hereunder.

4.       NOTICES

All notices and other  communications  about this  Guaranty  must be in writing,
must be given by facsimile,  hand delivery or overnight courier service and must
be  addressed or directed to the party at the  following  address (or other such
address  as a party may  designate  from time to time by notice  given  pursuant
hereto):

If to the Representative:
         AJG Financial Services, Inc.
         c/o Arthur J. Gallagher & Co.
         Gallagher Centre
         2 Pierce Place
         Itasca, Illinois
         Attention: Vice President and General Counsel
         Facsimile No. 630-285-3483

If to the Guarantor or Merger Sub:
         U.S. Energy Systems, Inc.
         One North Lexington Avenue, 4th Floor
         White Plains, New York 10601
         Attention:  Goran Mornhed, President and Chief Operating Officer
         Facsimile No. 914-271-5315

With a copy to:
         Robinson Brog Leinwand Greene
            Genovese & Gluck P.C.
         1345 Avenue of the Americas
         New York, New York 10105-0143
         Attention: Allen J. Rothman, Esq.
         Facsimile No. 212-956-2164

Notices  are  effective  when  actually  received by the party to which they are
given, as evidenced by facsimile  transmission report, written acknowledgment or
affidavit of hand delivery or courier receipt.

5.       MISCELLANEOUS

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This Guaranty shall be governed by and construed in accordance  with the laws of
the State of Delaware without regard to the conflicts of law provisions thereof.
To the extent  permitted by  applicable  law, the  Guarantor  hereby  waives any
provision  of law that  renders any  provision  hereof  invalid,  prohibited  or
unenforceable  in any respect and agrees that if any  provision of this Guaranty
is invalid,  prohibited or unenforceable  in any  jurisdiction  such invalidity,
prohibition or  unenforceability  shall not  invalidate or render  unenforceable
such  provision  in any  other  jurisdiction  and  the  validity,  legality  and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.

6.       SUCCESSORS AND ASSIGNS

All rights under this Guaranty  shall inure to the benefit of the successors and
assigns  of the  Counterparty.  The  Guarantor  may not assign or  delegate  its
obligations hereunder without the express written consent of the Counterparty.

7.       NO WAIVER OR AMENDMENT

No  failure  to  exercise  and  no  delay  in  exercising,  on the  part  of the
Counterparty,  any right, power or privilege hereunder shall operate as a waiver
thereof,  nor shall any  single  or  partial  exercise  of any  right,  power or
privilege preclude any other or further exercise thereof, or the exercise of any
other power or right. The rights and remedies herein provided are cumulative and
not  exclusive  or any rights or remedies  provided by law. No provision of this
Guaranty shall be waived, amended or supplemented except by a written instrument
executed by Merger Sub, Guarantor and the Counterparty.

8.       ENTIRE AGREEMENT

This  Guaranty is the entire and only  agreement  between the  Guarantor and the
Counterparty   with   respect  to  the   guaranty   of  the   Obligations.   All
representations,   warranties,   agreements,   or  undertakings   heretofore  or
contemporaneously made, which are not set forth herein, are superseded hereby.



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         IN WITNESS  WHEREOF,  the Guarantor has caused this Guaranty to be duly
executed and delivered as of the date first written above.

                            U.S. ENERGY SYSTEMS, INC.




                            By: /s/  Goran Mornhed
                                -------------------
                               Name:  Goran Mornhed
                               Title: President & Chief Operating Officer