Heating Degree Day - HDD

What is Heating Degree Day - HDD

A heating degree day (HDD) is a measurement intended to evaluate the demand for energy expected to warm a building. It is the number of degrees that daily's average temperature is below 65^o Fahrenheit (18^o Celsius), which is the temperature below which buildings should be warmed. The price of climate derivatives traded in the colder time of year depends on an index comprised of month to month HDD values. The settlement price for a climate futures contract is calculated by summing HDD values for a month and increasing that sum by $20.

Nuts and bolts of Heating Degree Day - HDD

While HDD can depict the overall requirement for heating as part of the planning for residential or commercial buildings, it is critical for the pricing of weather futures. Thus, that makes a risk management device that utility, agriculture, construction and different firms can use to hedge their activities that rely upon the climate — energy needs, developing season, outdoor work time, and so forth. The main climate futures contracts in view of HDD were listed in September 1999 at the Chicago Mercantile Exchange (CME).

Instructions to Calculate Heating Degree Day (HDD)

There are several methods for working out HDD. The more nitty gritty a record of temperature data, the more accurate the HDD computation.

Deduct the average of a day's high and low temperatures from 65. For instance, assuming the day's average temperature is 50^o F, its HDD is 15. Assuming that day's average is over 65, the outcome is set to zero. In the event that consistently in a 30-day month had an average temperature of 50^o F, the month's HDD value would be 450 (15 x 30). The nominal settlement value for that month's weather derivative contract would hence be $9,000 (450 x $20).
Deduct every half-hourly temperature perusing from 65, with the provision that negative values be set to zero, then sum the outcome and gap by 48 (48 half-hours in a day). Then, at that point, sum that value more than 30 (for a 30-day month) and duplicate by $20. Assuming a given day's value is not exactly or equivalent to zero, that day has zero HDD. However, assuming the value is positive, that number addresses the HDD on that day.

For all methods, assuming the value for some random day is not exactly or equivalent to zero, that day has zero HDD. However, assuming the value is positive, that number addresses the HDD on that day.

A comparative measurement, cooling degree day (CDD), mirrors the amount of energy used to cool a home or business.

One caveat is that heating degree days are incredibly limited. Heating (and cooling) needs shift significantly contingent upon the geographical region. What's more, further, the average HDD in one building might not have a similar impact as it does in the building next door due to differences in construction, orientation relative to different buildings, protection, sun exposure, and the idea of the building's utilization.

Highlights

A Heating Degree Day (HDD) measures the average number of days that the temperature decreases below 65 degrees fahreinheit. At that temperature, buildings turn on heating systems to keep up with average temperatures of 70 degrees.
HDD is set to zero on the off chance that it has a negative value.
HDD is utilized in computations of climate futures contracts, which are utilized as a risk management device by industries, for example, construction and agriculture, whose operations are impacted by weather patterns.