What is Heating Degree Day (HDD)?
Heating degree day (HDD) assesses building energy use. The average daily temperature below 65° Fahrenheit (18° Celsius) requires structure heating. Winter weather derivative prices are based on a monthly HDD index. To determine the settlement price for a weather futures contract, add the monthly HDD values and multiply by $20.
Heating Degree Day Basics
HDD can assess heating needs for home or commercial buildings, but it is crucial for future pricing. This provides a risk management tool for utilities, agriculture, construction, and other industries to hedge weather-dependent activities such as energy consumption, growing season, and outdoor employment. The Chicago Mercantile Exchange (CME) issued the first HDD-based weather futures contracts in September 1999.
Calculating Heating Degree Day
There are numerous HDD calculations. For more accurate HDD calculations, keep precise temperature data records.
- Subtract the average daily high and low temperatures from 65. A day with an average temperature of 50 °F has an HDD of 15. If the daily average is above 65, the outcome is zero. A 30-day month with an average temperature of 50 oF would have an HDD value of 450 (15 x 30). The nominal settlement value for the weather derivative contract for that month is $9,000 (450 x $20).
- Subtract each half-hourly temperature reading from 65, setting negative readings to zero, then total and divide by 48. Sum that amount over 30 days and multiply by $20. Days with a value of zero or less have zero HDD. If the figure is positive, it indicates the HDD for that day.
Zero HDD occurs on days with values less than or equal to zero for all techniques. If the figure is positive, it indicates the HDD for that day.
A cooling degree day (CDD) measures the energy consumed to cool a home or business.
Note that heating-degree days are relatively localized. Regional heating and cooling demands vary substantially. The average HDD in one structure may have a different influence than in the next because of variances in architecture, orientation, insulation, solar exposure, and usage.
Conclusion
- A Heating Degree Day (HDD) is the average number of days below 65 degrees Fahrenheit. That temperature activates building heating systems to maintain 70 degrees.
- If HDD is negative, it’s zero.
- HDD calculates weather futures contracts, which construction and agriculture use to control risk.
