What is the heating degree-day – HDD
A heating degree day (HDD) is a measure designed to quantify the energy demand required to heat a building. It is the number of degrees that the average temperature of a day is less than 65o Fahrenheit (18o Celsius), which is the temperature below which buildings should be heated. The price of weather derivatives traded in winter is based on an index composed of monthly hard drive values. The settlement price of a weather futures contract is calculated by adding the values of the hard drive for one month and multiplying this amount by $ 20.
Basics of heating degree day – HDD
Although the hard drive can describe the overall heating requirement for planning residential or commercial buildings, it is essential for pricing future weather conditions. In turn, this creates a risk management tool that utilities, agriculture, construction, and other businesses can use to cover their weather-dependent activities – energy needs, growing season, working time. outdoors, etc. The first hard drive weather based futures contracts were listed in September 1999 on the Chicago Mercantile Exchange (CME).
How to calculate the heating degree day (HDD)
There are several ways to calculate the hard drive. The more detailed the recording of temperature data, the more precise the calculation of the hard disk.
- Subtract the average high and low temperatures for a day from 65. For example, if the average temperature for a day is 50o F, his hard drive is 15. If the average for this day is greater than 65, the result is set to zero. If each day in a month of 30 days had an average temperature of 50o F, the value of the hard drive of the month would be 450 (15 x 30). The nominal settlement value of the weather derivative contract for this month would therefore be $ 9,000 (450 x $ 20).
- Subtract each temperature reading every half hour from 65, provided the negative values are set to zero, then add the result and divide by 48 (48 half hours per day). Then add this value to 30 (for a month of 30 days) and multiply by $ 20. If the value for a given day is less than or equal to zero, that day has no hard drive. But if the value is positive, this number represents the hard drive on that day.
For all methods, if the value of a given day is less than or equal to zero, that day has no hard disk. But if the value is positive, this number represents the hard drive on that day.
A similar measure, the degree-day of cooling (CDD), reflects the amount of energy used to cool a home or business.
One caveat is that the heating degree days are extremely localized. Heating (and cooling) requirements vary considerably by geographic region. In addition, the average hard drive in one building may not have the same impact as in the neighboring building due to differences in construction, orientation relative to other buildings, insulation, sun exposure and nature of the use of the building.
Key points to remember
- A Heating Degree Day (HDD) measures the average number of days that the temperature drops below 65 degrees Fahreinheit. At this temperature, buildings turn on heating systems to maintain average temperatures of 70 degrees.
- The hard drive is reset if it has a negative value.
- The hard drive is used in weather forecast calculations, which are used as a risk management tool by industries, such as construction and agriculture, whose operations are affected by weather conditions.