Brazil’s federal government appears to be dedicating serious effort – at long last – to developing the country’s solar industry.

Although Brazil has a population of nearly 200 million, it only has 42 MW of cumulative installed capacity. For the sake of comparison, that level of capacity is roughly on par with the state of Connecticut, which only has population of about 3.6 million.

Brazil is currently experiencing the worst drought in its history along with a failing hydroelectric system, which is putting dramatic upward pressure on the cost of electricity. These circumstances likely serve as backdrop to the renewed interest in solar investment. The Brazil Electricity Agency (ANEEL) has announced two solar auctions to take place later this year. The first auction, scheduled for August 14th, will auction solar only and the second, slated for November 1st, will auction both solar and wind.

Hydroelectric dam power is Brazil’s primary source of electricity. Diminishing output from that source paired with consistently high demand has forced Brazilian electricity distributors to purchase expensive backup power on the spot market. The two auctions were set up by ANEEL to allow the electricity distributors the opportunity to purchase solar energy from developers. The distributors and solar developers engage in a reverse auction with a price ceiling set by ANEEL.

This type of auction system has been in existence for several years with a mixed record of success. Several early attempts at auctions of this sort combined solar with other energy sources. Solar could not find a place in those auctions which resulted in zero signed agreements between electricity distributors and solar developers. The first auction where power purchase agreements (PPA’s) were successfully obtained was at the October 2013 solar-only auction in the Brazilian State of Pernambuco. Five projects totaling 122 MW were contracted. To date, none of the projects from the Pernambuco auction have reached a financial close.

On October 31st, 2014 the first successful federal solar auction was completed. 31 projects for a total of 890 MW received PPAs from electricity distributors. The clearing price for the auction was among the lowest prices for solar in the world at BRL 215 per megawatt hour ($87/MWh). Many experts believe that these projects will have difficulty reaching financial close due to the low auction price. The closing of these projects is further exacerbated by logistics. Currently the vast majority of the equipment for solar projects are imported and priced in US dollars. The appreciation of the dollar and its impact on the Brazilian economy has only served to make reaching financial close on any of these projects less likely.