SEPARATION AGREEMENT AND WAIVER AND RELEASE

Exhibit 10.1

SEPARATION AGREEMENT AND WAIVER AND RELEASE

     This Separation Agreement and Waiver and Release (this “ Agreement ”) is entered into by and between BPI Energy Holdings, Inc., a British Columbia corporation (together with its affiliates and subsidiaries, “ BPI ”), and George J. Zilich (“ Zilich ”) as of this 12th day of October, 2006.

     A. Zilich has been employed by BPI as its Chief Financial Officer and General Counsel pursuant to a letter agreement between BPI and Zilich dated as of January 6, 2005 (the “ Employment Agreement ”) and has also served as a member of the board of directors of BPI.

     B. Zilich will resign as an employee, officer, and director of BPI, and this Agreement sets forth the terms upon which Zilich’s employment by, and term as a director of, BPI will cease.

     NOW, THEREFORE, in consideration of the agreements, warranties, and covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, BPI and Zilich agree as follows:

     1.  Resignation . Effective as of October 12, 2006, or such other date as the parties may agree (the “ Separation Date ”), Zilich will and hereby does resign as an employee, officer, and director of BPI and resigns from any and all other positions, if any, held by him with respect to BPI and its subsidiaries and affiliates.

     2.  Consideration . In consideration of Zilich entering into this Agreement, BPI will:

     BPI will make each of the payments and take each of the actions contemplated by this Section 2 notwithstanding the death or disability of Zilich prior to January 2, 2008. BPI and Zilich agree that the payments to be made to Zilich pursuant to this Section 2 are allocated as follows: the payments provided for in (a) of this Section to BPI’s obligations under the Employment Agreement, the payments provided for in (c) of this Section for Zilich’s obligations under Section 4 of this Agreement, and the payments provided for in (d) and (e) of this Section for Zilich’s obligations and undertakings under Sections 3, 5(a) and 10 of this Agreement. BPI and Zilich further agree that the other consideration to be provided to Zilich pursuant to this Section 2 is allocated as follows: the consideration provided for in (f) of this Section to BPI’s obligations under the Employment Agreement and the consideration provided for in (b) of this Section for Zilich’s obligations under Section 4 of this Agreement. BPI and Zilich further agree that as of the date of this Agreement Zilich holds 475,000 shares of BPI restricted stock and that any purported transfer of any shares of such restricted stock by Zilich to BPI prior to the date of this Agreement is and will be deemed null and void. BPI and Zilich further agree that all federal, state and local income and payroll taxes associated with the consideration to be transferred to Zilich hereunder and which may be subject to withholding and deductions will be deemed satisfied in full as follows: (i) the transfer by Zilich to BPI of 40,000 of the Unrestricted Shares pursuant to (b) of this Section; and (ii) the surrender by Zilich of 94,280 shares of the BPI restricted stock currently held by Zilich. The consideration paid under (a) of this Section will be reported by BPI on an IRS Form W-2. To the extent reportable by BPI, all other consideration paid hereunder will be reported as income to Zilich with applicable taxing authorities by way of an IRS Form 1099.

     3.  Non-Competition; Non-Solicitation . Between the Separation Date and the second anniversary of the Separation Date, Zilich will not (a) engage, either directly or indirectly, as an employee, officer, director, shareholder (other than as a shareholder of less than five percent (5%) of the issued and outstanding stock of a publicly-traded corporation), or partner in a business that is competitive with the coal bed or coal mine methane gas extraction, exploration, analysis, or development business of BPI in the geographical territory known as the “Illinois Basin,” or (b) solicit or attempt to solicit, either on Zilich’s behalf or on behalf of any of third party, or assist any third party in soliciting, any employee of BPI to leave or terminate their employment with BPI; provided, however, that Zilich may respond affirmatively to any requests from employees of BPI that he act as an employment reference for any such employee.

     4.  Continuing Services . Between the Separation Date and January 2, 2008, Zilich will provide BPI with consulting services as may be reasonably requested by BPI from time to time in order to facilitate the continuing operation of BPI and the transition of his duties and responsibilities; provided, however, that Zilich will not be required (a) to travel from his residence or any future place of employment or (b) to devote more than five hours during any calendar month in providing such consulting services. BPI and Zilich will, in good faith, coordinate the time and manner of the consulting services to be provided by Zilich to avoid conflicts with Zilich’s personal or business activities or schedule. BPI will reimburse Zilich for any reasonable out-of-pocket expenses incurred by Zilich in providing any consulting services requested by BPI in accordance with BPI’s expense reimbursement policy. In the event that BPI requests that Zilich perform consulting services that would be inconsistent with the limitations contained in (a) and (b) of this Section, Zilich may condition providing such services upon payment by BPI of reasonable additional compensation.

     5.  Waiver and Release .