What is 'Heating Degree Day - HDD'

The number of degrees that a day's average temperature is below 65oFahrenheit (18o Celsius), the temperature below which buildings need to be heated. The price of weather derivatives traded in the winter is based on an index made up of monthly HDD values. The settlement price for a weather futures contract is calculated by summing HDD values for a month and multiplying that sum by $20.

Explaining 'Heating Degree Day - HDD'

To calculate HDD, take the average of a day's high and low temperatures and subtract from 65. For example, if the day's average temperature is 50o F, its HDD is 15. If every day in a 30-day month had an average temperature of 50o F, the month's HDD value would be 450 (15 x 30). The nominal settlement value for this month's weather derivative contract would therefore be $9,000 (450 x $20).

Further Reading

Modeling and forecasting cumulative average temperature and heating degree day indices for weather derivative pricing
link.springer.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

Agricultural applications of weather derivatives
clutejournals.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

Modeling and forecasting CAT and HDD indices for weather derivative pricing
link.springer.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

Insurance against weather risk: Use of heating degree-days from non-local stations for weather derivatives
link.springer.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

WEATHER DERIVATIVES AS TOOLS FOR FINANCIAL MANAGEMENT OF NATURAL DISASTER RISK
search.proquest.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

An Explicit Distribution to Model the Proportion of Heating Degree Day and Cooling Degree Day
www.tandfonline.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

Using weather derivatives to manage financial risk in deregulated electricity markets.
elibrary.ru [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

Daily air temperature and electricity load in Spain
journals.ametsoc.org [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …

Investment analysis of gas-turbine combined heat and power systems for commercial buildings under different climatic and market scenarios
www.sciencedirect.com [PDF]
… HDD y , where Q h,yr is the yearly energy consumption, UA the overall heat transfer coefficient … η h the efficiency of the heating system, and HDD y is the yearly heating degree-days [3], [4 … potential consumption for other η h values where (η h ) new is the new heating efficiency for …