Document:

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                                                                   Exhibit 10.26

                        CONFIDENTIAL TREATMENT REQUESTED
[*] IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED
                   AND FILED SEPARATELY WITH THE COMMISSION.
        CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
                               OMITTED PORTIONS.

                 Technology Development and Transfer Agreement

                                    between

                        Kawasaki Heavy Industries, Ltd.

                                      and

                    Catalytica Energy Systems, Incorporated

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     1.9     "CESI Technology" means the Technology relating to the XONON
             Combustion System and the Xonon Module, including the Background
             Technology, Applied

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

      KHI will pay CESI, as the consideration for the CESI Technology to be
      provided by CESI to KHI under this Agreement, the amounts of [*] for each
      of the 1/st/ through [*] Adapted Kawasaki Gas Turbines and of [*] for each
      of the [*] through [*] Adapted Kawasaki Gas Turbines, sold by KHI and/or
      its Affiliates for installation anywhere in the world, provided, however,
      that such payments become due and payable [*] days after KHI's receipt of
      the initial payment for each Adapted Kawasaki Gas Turbines respectively
      sold. Should [*] Adapted Kawasaki Gas Turbines not be sold during the term
      of the Agreement, the balance of payment by KHI shall be forgiven.
      However, in case of earlier termination of the Agreement by KHI prior to
      the term of the Agreement, due to the reason not attributable to CESI
      under Article 10.2, the balance of payment by KHI shall be due and
      payable. KHI agrees to make commercially reasonable efforts to sell
      Adapted Kawasaki Gas Turbines during the term of this Agreement and CESI
      agrees to cooperate with KHI in support of KHI's sales efforts.

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

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

             [*]

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

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

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

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

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

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

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

      4.5    Grant Back. KHI and its Affiliates and subcontractors hereby grant
             -----------
             back to CESI an irrevocable and fully paid-up license to make,
             sell, lease, have made, use, export and import, service, repair,
             reconstruct the Xonon Combustion System and Xonon Module including
             rights to sublicense, to all improvements thereof, whether made
             solely by KHI or jointly with its Affliates and/or subcontractors,
             which are conceived during the term of this Agreement and the term
             of the Supply Agreement to be concluded between KHI and CESI with
             respect to supply of the Xonon Module. Such license shall be i)
             exclusive with respect to improvements of the Xonon Module, and
             ii) Non-exclusive with respect to improvements of the Xonon
             Combustion System and Xonon Control Algorithm.[* ].

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

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

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

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

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

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

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

      6.1     [*].

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

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

      7.1    Nondisclosure and Use Obligations. Except as otherwise provided in
             ----------------------------------
             this Article 7, during the term of this Agreement and for a period
             of five (5) years thereafter and in no event, for less than a
             total ten (10) years from Effective

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             Date, all information of a confidential nature disclosed pursuant
             to this Agreement by one party to another and, in the case of
             documents, designated by the disclosing party by an appropriate
             stamp, marking or legend as being confidential to the disclosing
             party shall be used by the receiving party only for the purposes of
             this Agreement and shall be maintained as confidential by the
             receiving party, using the same safeguards as it uses to protect
             its own confidential information of a similar character. The
             receiving party will not publish or disclose to Third Parties any
             such received information of a confidential nature without the
             prior express written consent of the disclosing party. The
             foregoing obligations on use and disclosure of confidential
             information shall not apply to any information which:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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             infringing the CESI Technology, including the Applied CESI
             Technology, the Product or the Xonon Control Algorithm which
             satisfies agreed upon performance specifications. In the event CESI
             is unable to eliminate the infringement by any of the
             aforementioned measures, then CESI and KHI shall meet and agree on
             possible alternatives which as a last resort, shall include CESI
             taking back any infringing Product or Xonon Control Algorithm and
             refunding the purchase price for such Product or Xonon Control
             Algorithm, subject to KHI's agreement which shall not be
             unreasonably withheld. This indemnity is further subject to the
             understanding and agreement that KHI components are not covered by
             CESI's warranty under this Article 9.3.

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

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

      9.6    KHI License. In the event KHI conceives inventions or exchanges
             ------------
             Technical Information comprising improvements and/or modifications
             to the Xonon Module during the period of this Agreement and for
             five (5) years following expiration or termination of this
             Agreement and/or if KHI conceives, by participation in whole or in
             part of KHI employees who had access to CESI Technology, any
             invention comprising an improvement or modification to the

                                       11
<PAGE>

             Xonon Combustion System and/or Xonon Module or develops Technology
             which is derived from CESI Technology, during such period, then KHI
             shall grant to CESI an exclusive royalty-free, perpetual world-
             wide, irrevocable license (with unrestricted rights to sublicense)
             to make, have made, use, sell, lease and/or export Products under
             both the aforesaid technical information and any Patents which
             result from the aforesaid inventions

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

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

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

                                       12
<PAGE>

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

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

      10.2  [* ].

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

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

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

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

      10.4  [*].

     10.5   Effect of Termination. Termination of this Agreement shall not
            ----------------------
            relieve the

                                       13
<PAGE>

            parties of any obligation accruing prior to such termination. The
            provisions of Articles 4.3 and 4.5 [Technology and Use Rights
            Transfer], Article 6 [Warranty and Representation by CESI], Article
            7 [Confidentiality], Article 9 [Technology and Patent Rights],
            Article 11 [Settlement of Disputes] and Article 12 [Indemnity] shall
            su rvive the expiration or any termination of this Agreement.

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

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

12.0  INDEMNITY
      ---------

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

      12.2  Procedure. A party (the "Indemnitee") that intends to claim
            ----------
            indemnification under Article 12.1 shall promptly notify the other
            party (the "Indemnitor") of any Liability or action in respect of
            which the Indemnitee or any of its Affiliates intend to claim such
            indemnification, and the Indemnitor shall have the right to
            participate in, and, to the extent the Indemnitor so desires,
            jointly with any other Indemnitor similarly noticed, to assume the
            defense thereof with counsel selected by the Indemnitor. The
            indemnity obligations under Article 12.0 shall not apply to amounts
            paid in settlement of any loss, claim, damage, liability or action
            if such settlement is effected without the consent of the

                                       14
<PAGE>

            Indemnitor, which consent shall not be withheld unreasonably. The
            failure to deliver notice to the Indemnitor within a reasonable time
            after the commencement of any such action, if materially prejudicial
            to its ability to defend such action, shall relieve such Indemnitor
            of any liability to the Indemnitee under Article 12.0, but the
            omission so to deliver notice to the Indemnitor will not relieve it
            of any liability that it may have to any Indemnitee otherwise than
            under Article 12.0. The Indemnitor may not settle the action or
            otherwise consent to an adverse judgment in such action that
            diminishes the rights or interests of the Indemnitee without the
            express written consent of the Indemnitee. The Indemnitee, its
            employees and agents, shall cooperate fully with the Indemnitor and
            its legal representatives in the investigation of any action, claim
            or liability covered by this indemnification at Indemnitor's
            expense.

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

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

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

      This Agreement may not be assigned or otherwise transferred, nor, except
      as expressly provided hereunder, may any right or obligations be assigned
      or transferred by either party without prior consent of the other party;
      provided further, however that (i) each party may assign its rights and
      interests, and delegate its obligations, hereunder, effective upon written
      notice thereof, to any Affiliate, and (ii) either party may assign its
      rights and interests, and delegate its obligations, hereunder, effective
      upon written notice thereof, to any Third Party which acquires all or
      substantially all of the assets of CESI or KHI, as the case may be, or
      which is the surviving third party in a merger or consolidation with
      either of CESI or KHI as the case may be, if such Third Party assumes all
      of the obligations of CESI or KHI, as the case may be, hereunder. Subject
      to the foregoing, any reference to CESI or KHI hereunder shall be deemed
      to include the successors thereto and assigns thereof. Notwithstanding
      anything to the contrary contained in this Article 14.0, if, without KHI's
      prior written consent, either (a) CESI assigns or otherwise transfers its
      rights and interests under this Agreement to any Competing Manufacturer
      (defined below) including any transfer by merger or asset sale; or (b) any
      Competing Manufacturer purchases or otherwise obtains a controlling
      ownership interest (defined as 50% or more ownership interest) in CESI;
      then this Agreement shall terminate upon KHI's election and written notice
      thereof to CESI and such termination shall be deemed a termination for
      cause under Article 10.3. For the purposes of this Agreement, "Competing
      Manufacturers" shall mean only companies that design, manufacture and sell
      gas turbines of less than [*] for power generation or mechanical drive
      applications.

                                       15
<PAGE>

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

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

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

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

                                       17
<PAGE>

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

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

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

By:      /s/ Kengo Yamashita                    By:   /s/ Patrick T. Conroy
         ---------------------------                  --------------------------
Name:     Kengo Yamashita                       Name:  Patrick T. Conroy

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

                                       18
<PAGE>

                                   Exhibit 1

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

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

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

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

                                       19
<PAGE>

                                   Exhibit 2

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

       CESI Xonon 2.1 system emissions Performance Specification

       [* ]

                                       20
<PAGE>

                                   Exhibit 3

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

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

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

                                                                            END.

                                       21
<PAGE>

                                   Exhibit 4

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

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

[* ]

Fuels with compositions outside of the above limits must be referred to
Catalytica for evaluation.

[* ].

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

[* ]

[* ].

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

NOTE: [* ].  Consult with Catalytica regarding feasibility of specific fuels.

                                       22
<PAGE>

                                  Appendix A

1.   Drawings

     All drawings necessary to procure fabricated components for Xonon Ver. 2.1
     must be complete and shipped to KHI by either FedEx or DHL by November 1,
     2000.(( Part numbers for purchased items (e.g. bolts, thermocouples,
     standard flanges, etc.) will be provided in place of drawings.)) Proof of
     shipment shall be by providing the shipping company's tracking number.

[* ]

                                       23<PAGE>

                                                                   Exhibit 10.27

                       CONFIDENTIAL TREATMENT REQUESTED
        [*] IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN
               OMITTED AND FILED SEPARATELY WITH THE COMMISSION.
          CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
                             THE OMITTED PORTIONS.

                       Xonon(TM)  Module Supply Agreement

This Agreement is made as of this 13/th/ day of December, 2000, by and between
Kawasaki Heavy Industries, Ltd. (hereinafter referred to as "KHI"), a Japanese
corporation and having its principal place of business at 1-1 Higashi-Kawasaki-
cho 3-chome, Chuo-ku, Kobe, Japan;  Kawasaki Motors Corp., U.S.A. (hereinafter
referred to as "KMC"), a Delaware corporation and having its principal place of
business at 5080 36th Street S.E. Grand Rapids, Michigan, U.S.A. and Catalytica
Energy Systems, Incorporated (hereinafter referred to as "CESI"), a Delaware
corporation and having its principal place of business at 430 Ferguson Drive,
Mountain View, California, U.S.A., any or all of which shall also be hereinafter
referred to as a "party", and together as the "parties", respectively.

Whereas KHI and CESI entered into Technical Development and Transfer Agreement
dated as of 13/th/ day of December, 2000 (hereinafter referred to as "TDTA"),
and agree to execute the Supply Agreement separately under Article 5.0 of the
TDTA; and

Whereas KHI and KMC are desirous to procure the XONON Module(s) from CESI, to be
incorporated into the Adapted M1A-13A and/or the Adapted Kawasaki Gas Turbines
or to be used as replacement of such XONON Module(s) , under the terms and
conditions as set forth in the Supply Agreement.  CESI is also desirous to
supply KHI and KMC with the XONON Module(s) , to be incorporated into the
Adapted M1A-13A and/or the Adapted Kawasaki Gas Turbines or to be used as
replacement of such XONON Module(s), under the terms and conditions as set forth
in the Supply Agreement.

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

1.   Definitions
     -------------

Unless otherwise as specifically defined in this Agreement, the capitalized
words used in this Agreement shall have the same meanings as defined in the
TDTA.

2.   Customer Use / Rights
     ---------------------

CESI furnishes each XONON Module to KHI/KMC under the terms of a License with
the KHI/KMC having rights to sub-license the XONON Module to the operator of the
gas turbine (hereinafter the End User) only for installation in a gas turbine
combustion system designed specifically for such use by KHI/KMC licensed by CESI
pursuant to a written License.  The XONON Module consists of the container and
its internal components including the catalytically active elements.  The term
of License to the End User is for the period of time during which the XONON
Module is capable of combusting the specified range of fuel within the limits
set forth by CESI for emissions of NOx and other products of combustion.

KHI/KMC or its End User shall recover and return to CESI, freight prepaid, the
spent XONON

                                       1
<PAGE>

Module immediately after it is removed from service in the gas turbine. This
license does not confer on KHI/KMC or the End User any rights of ownership of
such XONON Module or in any underlying technology rights, of any type, embodied
or used therein. The license to the End User is not transferable to any other
person, user, supplier, or customer; nor does it extend beyond the duty life of
the XONON Module. No warranty of CESI extends to any non-CESI provided XONON
Module nor to the operation of any turbine not using a CESI provided XONON
Module.

If any returned XONON Module, which on inspection by CESI is substantiated by
CESI by reasonable proof with the consent of KHI/KMC to have been damaged,
altered, misused, tampered with or disassembled, in whole or in part, result in
forfeiture of the core charge for that module XONON Module

All Licenses KHI/KMC enters with End Users shall include such terms, and KHI/KMC
shall enforce the terms of its Licenses with End Users.

3.   Acceptance
     ----------

The issuance of a purchase order document by KHI/KMC under and with reference to
this Agreement shall constitute a definitive contract of sale (herein
"Order"),subject to acknowledgement by CESI to the said purchase order within
seven (7) calendar days after the issuance thereof. Provisions contained in
purchase order documents issued   under and with reference to this Agreement
which materially add to or subtract from the provisions of this Agreement shall
not be a part of the Order unless specifically agreed to in CESI's written
acknowledgement.

4.   Modifications/Changes.
     ---------------------

Requests by KHI/KMC for any modifications or changes to the Order, including but
not limited to changes in specifications, quantities, delivery obligations and
terms of payment, must be made in writing. All such requests are subject to
CESI's written acceptance (such acceptance shall not be unreasonably withheld by
CESI) and may result in adjustments to price and / or delivery schedules.

5.   Prices and Payments
     -------------------

The License for the XONON Module has two price components.
The Core Charge is a charge levied on being granted the License for each XONON
Module and is subject to refund or credit to the account of KHI/KMC on return of
the spent XONON Module in good condition, reasonable wear and tear excepted, and
on the condition that the terms of the License have not been violated.  The Use
Charge is levied on procurement by KHI/KMC of each XONON Module and is not
refundable.

Unless otherwise specifically stated in CESI's offer, all prices are in U.S.
dollars and are valid for a period of ninety (90) days from the date of the
offer.

Prices of the XONON Module offered by CESI do not include sales, use or excise
taxes, import or export duties, special financing fees, value added taxes,
income or royalty taxes imposed outside the United States, consular fees,
special permits or licenses or

                                       2
<PAGE>

similar charges. KHI/KMC shall either pay any and all such taxes and charges or
provide CESI with acceptable exemption certificates. All the prices are based on
delivery EXWORKS factory (as defined by Incoterms 1990), and do not include any
charges for services such as preservation packaging, insurance, brokerage fees,
marine survey, load out and tie down, site installation, or equipment start-up.
Invoices shall be submitted to KHI/KMC according to the payment schedule stated
in the offer, otherwise, invoices shall be submitted to KHI/KMC upon readiness
of modules for shipment.  If payment originates in the United States, invoices
shall be due and payable NET 30 DAYS from date of the invoice without regard to
delays for inspection or transportation. If payment originates outside the
United States, KHI/KMC must establish an irrevocable letter of credit in a form
and with a bank acceptable to CESI. Unless otherwise specifically stated in the
offer, all payments shall be in U.S. dollars. Should KHI/KMC's financial
responsibility become unsatisfactory to CESI, cash payment or other security may
be required. If KHI/KMC fails to meet these requirements CESI may discontinue
manufacture and treat such failure as reasonable grounds for repudiation of the
Order. In such event, cancellation charges set forth in this Agreement shall be
due CESI. Past due invoices shall be subject to interest charges at the maximum
lawful rate of interest. (1.5% per month)

The breakdown of the Core charge and the Use charge, and payment terms thereof
shall be stipulated on EXHIBIT "A" attached hereto.

6.   Escalation.
     ----------

The Core charge and the Use charge shall be adjusted in accordance with the
formula as set forth in EXHIBIT "B" attached hereto.

7.   Risk of Loss.
     ------------

CESI warrants that the License and any sub-license to End Users granted
hereunder to KHI/KMC is rightful and free from any security interest or other
lien or encumbrance of third parties. Unless otherwise expressly agreed in
writing by CESI, risk of loss of the XONON Module shall pass to KHI/KMC upon
delivery of the XONON Module  EX-WORKS factory. Claims for damages or shortages
attributable to CESI must be in writing and received by CESI within thirty (30)
days after receipt of XONON Module or within thirty (30) days after notice of
loss, whichever shall occur first, and must be accompanied by CESI's packing
slip and full particulars of any such claim.  Prior to returning any XONON
Module for any reason, except the return of spent XONON Module in the normal
course of business, KHI/KMC must obtain a Return Material Authorization (RMA)
from the CESI sales department.

8.   Alternative Product Source
     --------------------------

In case that CESI is unable to consistently meet KHI/KMC's requirement for XONON
Module(s) from a quality or delivery standpoint, CESI shall promptly establish a
second source of supply (as a vendor to CESI) with a Third Party manufacturer
designated by CESI and approved by KHI (which approval shall not be unreasonably
withheld), solely for the purpose of satisfying CESI's obligations to supply
XONON Module(s) to KHI/KMC.

9.   Warranty
     --------

                                       3
<PAGE>

[*  ]

This warranty is conditioned on:
a. The XONON Module being installed and used in accordance with CESI's
recommended procedures and good industry practice, not altered, disassembled,
misused, tampered with or otherwise subjected to conditions outside the
environmental envelope specified; and,
b. Any defective XONON Modules are returned to CESI's facility without undue
delay within the Warranty Period in accordance with CESI's standard warranty
claim instructions, transportation charges prepaid; and,
c. Examination of such module(s) by CESI confirms the existence of such a
defect.

CESI's obligations under this warranty are limited to repair or replacement
including freight of such defective XONON Module(s) (as CESI elects ), free of
charge at CESI's place of business. Should multiple removal and reinstallation
during a single warranty period be required CESI will reimburse KHI/KMC for
reasonable costs of the second and subsequent installations. All replacement
XONON Module and repaired XONON Module are, warranted through, but not beyond,
the original Warranty Period. CESI's sole liability and responsibility, and
KHI/KMCs sole and exclusive remedy, with respect to this warranty shall be
limited to the remedies set forth above.

This warranty shall not apply to or include (i) Normal maintenance services or
adjustments, or (ii)  the removal or reinstallation of warranted modules except
as stated above (iii) any XONON Module which have been repaired or altered by
others, or (iv) the effects of corrosion, erosion or wear and tear or failure
occasioned by operation or condition of service more severe than specified.

CESI warrants that the XONON Module will conform only to such national, federal,
state or local laws, ordinances, regulations, codes and standards, as stated in
the Purchase Order applicable to the XONON Module supplied by CESI hereunder.

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

10.  Force Majeure
     --------------

CESI shall not be liable for any delay in performance, any nonperformance, or
any other deviation in performance of CESI's obligations, nor for any loss or
damage to the  XONON Module supplied hereunder, when occasioned directly or
indirectly by any cause or causes beyond the reasonable control of CESI or its
subcontractors or suppliers, including, but not limited to, acts of God, acts of
criminals or of the public enemy; war, riot; official or unofficial acts,
orders, regulations or restrictions of any governmental authorities, or failure,
shortage or delay in CESI's usual sources of labor or material supply caused by
such reasons as described in the proceeding of this sentence. CESI shall have a
reasonable extension of the time for performance when delayed by any such cause.

                                       4
<PAGE>

11.  Suspension of Order/Delay By KHI/KMC
     ------------------------------------

KHI/KMC's request for suspension of the Order or a delay in shipment must be
delivered in writing to CESI, and_shall be valid if dispatched by facsimile or
e-mail with confirmation by registered mail. Such suspensions or delays may
result in adjustments to prices, payments and delivery schedules and are subject
to the provisions of the agreement licensing Xonon technology to the KHI/KMC.
The time required for subsequent completion of the Order may exceed the number
of days of suspension or delay due to CESI's scheduling constraints. If a
suspension is more that sixty (60) days in duration, KHI/KMC will pay CESI pro
rata for the portion of the Order completed. In the event that production-
fabrication has proceeded to the point that CESI deems it cannot reasonably
reschedule completion or the request for suspension is received less then sixty
(60) days prior to scheduled shipment, the Order shall be completed, invoiced,
and the XONON Module placed in storage at KHI/KMC's expense. CESI shall retain
ownership and a security interest therein until payment of the total Order price
is received. In the event CESI is otherwise unable to deliver the  XONON Module
when ready due to the action or inaction of KHI/KMC, CESI shall so notify
KHI/KMC. Such inability to deliver shall also be subject to the above
provisions.

12.  Term and Termination
     --------------------

12.1  The term of this Agreement is five (5) years, and shall be automatically
      renewed for an indeterminate number of consecutive one year periods unless
      either party shall serve the other with a notice of the termination in
      writing at least 60 days prior to the next renewal date.
      Such termination is effective at the close the business on next
      anniversary date.

12.2  Either party may terminate this Agreement for cause upon the occurrence
      of any of the following:

      A)  The other party shall (a) seek the liquidation, reorganization,
      dissolution or winding up of itself (other than dissolution or winding up
      for the purposes of reconstruction or amalgamation) or the composition or
      readjustment of all or substantially all of its debts, (b) apply for or
      consent to the appointment of, or the taking of possession by, a receiver,
      custodian, trustee or liquidator of itself or substantially all of its
      assets, (c) make a general assignment for the benefit of its creditors,
      (d) commence a voluntary case under the Bankruptcy Code, (e) file a
      petition seeking to take advantage of any other law relating to
      bankruptcy, insolvency, reorganization, winding-up or composition or
      readjustment of debts, or (f) adopt any resolution of its Board of
      Directors or stockholders for the purpose of effecting any of the
      foregoing; or
      B)  A proceeding or case shall be commenced without the application or
      consent of the other party and such proceeding or case shall continue
      undismissed, or an order, judgment or decree approving or ordering any of
      the following shall be entered and continue unstayed in effect, for a
      period of ninety (90) days from and after the date service of process is
      effected upon the other party, seeking (a) its liquidation,
      reorganization, dissolution or winding up, or the composition or
      readjustment of all or substantially all of its debts, (b) the appointment
      of a trustee, receiver, custodian, liquidator or the like of itself or of
      all or substantially all of its assets, or (c) similar relief under any
      law relating to bankruptcy, insolvency, reorganization, winding up or
      composition or readjustment of debts; or

                                       5
<PAGE>

      C)  Upon or after the breach of any material provision of this Agreement,
      if the breaching party has not cured such breach within ninety (90) days
      after notice thereof from the non-breaching party, this Agreement shall
      terminate for cause, at the option of the non-breaching party, upon the
      expiration of such ninety (90) day cure period.

12.3  In case of termination of this Agreement by KHI/KMC in accordance with
      Article 12.2 due to the causes attributable to CESI, CESI agrees that
      (i)CESI shall supply KHI/KMC with the XONON Module(s) to be incorporated
      into Kawasaki Gas Turbines for the project of which order KHI/KMC has
      already received from its customers; and (ii) KHI/KMC shall have the
      rights as granted under the Article 10 of the TDTA to continue to purchase
      Xonon Modules during the remainder of the term if the Agreement had not
      been terminated by KHI/KMC.

13.  Patent Infringement.
     -------------------

CESI warrants that the XONON Module shall be delivered free of rightful claim of
any third party by way of infringement of any patent, trademark and other
intellectual property rights.  Subject to the limitation of liability as set
forth Article 16 hereof, CESI shall reimburse the damages incurred by KHI/KMC
due to any rightful claim raised by a third party alleging infringement and,
CESI will defend, indemnify and hold KHI/KMC harmless from any such claim for
infringement provided prompt notice and opportunity to defend is given by
KHI/KMC to CESI.  This warranty constitutes CESI's sole responsibility for
infringement claims.

14.  Assignments.
     -----------

Neither of the parties hereto may assign the whole or any part of this Agreement
and any rights or obligations under the Order to any third party without prior
written consent of the other party thereto, provided, however, that such consent
shall not be unreasonably withheld by such other party.

15.  Independent Contractor.
     ----------------------

At all times while performing the Order, CESI shall be deemed to be an
independent contractor and not an employee or agent of KHI/KMC. Equipment
operators and other KHI/KMC employees, agents, subcontractors, or servants
assigned to assist CESI may receive temporary instructions, directions, or
control from CESI but shall, at all times be considered the employees, agents,
subcontractors, or servants of KHI/KMC and not of CESI.

16.  Limitation of Liability.
     -----------------------

Neither KHI/KMC nor CESI or their Affiliates, subcontractors, agents and/or
employees shall be liable for any incidental or consequential damages
whatsoever, including but not limited to, loss of product, loss of profit
(except profit of CESI from the Order), loss of use of the power generation,
pumping or compression system or any auxiliary system, losses resulting from or
related to downtime of the modules or the cost of replacement power or
compression, heating, cooling or pumping, howsoever caused, and whether based on
warranty, contract, tort (including negligence) strict liability or otherwise.
The total liability of CESI, its affiliates,

                                       6
<PAGE>

subcontractors, agents and employees arising out of the performance or
nonperformance of the Order or its obligations in connection with the design,
manufacture, sale, delivery, storage, installation or use of modules or the
rendering of any work or services in connection therewith, whether based on
warranty, contract, tort, (including negligence), strict liability or otherwise,
shall not exceed in the aggregate a sum equal to the Order price. The limitation
of liability set forth in this article shall prevail over any conflicting or
inconsistent provisions contained in any document comprising the Order. [* ]

17.  Regulatory Compliance.
     ---------------------

KHI/KMC shall not use or operate the XONON Module in a manner other than that
intended in CESI's offering without CESI's prior written consent. The XONON
Module shall not be exported or transshipped contrary to U.S. law.  As KHI/KMC
is the exporter of record (XONON Module sold EX-WORKS), it is the responsibility
of KHI/KMC to acquire any required export license. CESI will assist in the
supply of information required in the application process

18.  Disputes/applicable law.
     -----------------------

KHI/KMC and CESI shall use their best efforts to resolve any dispute or claim
which may arise under the Order and/or this Agreement in an amicable manner. In
the event CESI is in breach of or noncompliance with any of the provisions of
the Order and/or this Agreement, KHI/KMC shall notify CESI in writing and CESI
shall take reasonable measures to remedy such breach or noncompliance within
fourteen (14) days after receipt of notice. Any dispute or claim arising out of
or in relation to the Order and/or this Agreement which is not settled by
agreement of the parties shall be submitted to arbitration before a single,
qualified, technically trained, arbitrator selected by mutual consent of the
parties in accordance with the Rules of the American Arbitration Association,
(but the auspices, at CESI election, need not be used) and judgment upon the
arbitrators award may be entered in any court having jurisdiction.  The rules of
commercial arbitration of AAA shall apply in any arbitration and the laws of the
state of California shall govern. The request for arbitration shall be made
within a reasonable time after the dispute or claim arises, and in no event
after it would be barred by any applicable statute of limitations. The cost of
such arbitration shall be borne as determined by the arbitrator. Unless
otherwise mutually agreed, arbitration hearings shall be held in Los Angeles
,California, U.S.A. Should any provision of the Order and/or this Agreement be
declared invalid, such declaration shall not invalidate or void the remaining
provisions of the Order and/or this Agreement except that such invalidated
provisions are indispensable to such Order and/or this Agreement.

                                       7
<PAGE>

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

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

By:      /s/ Kengo Yamashita                    By:   /s/ Patrick T. Conroy
         ____________________________________         __________________________
Name:     Kengo Yamashita                       Name:  Patrick T. Conroy

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

AGREED FOR AND ON BEHALF OF
Kawasaki Motors Corp, U.S.A.
GAS TURBINE DIVISION

By :
/s/ Hiro Matsumura
______________________________
Name:  Hiro Matsumura

______________________________
Title:   General Manager

______________________________

                                       8
<PAGE>

                                  EXHIBIT "A"

Prices of Xonon Modules:  [* ]
------------------------

                                       9
<PAGE>

                                  EXHIBIT "B"

Price adjustment
----------------

1.   Quarterly adjustment of Core Charge. The core charge shall be adjusted on
     the first business day of every calendar quarter in accordance with the
     following formula:

     [* ]

2.   Quarterly adjustment of Use Charge. The use charge shall be adjusted on the
     first business day of every calendar quarter in accordance with the
     following formula:

     [* ]

                                       10

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