Absence makes the heart grow fonder. That’s how you may feel when you turn on your shower and realize there’s no hot water. Your water heater might not be something you think about every day, but most of us love – and often take for granted – the comfort and safety we get from our hot water. Once you’re reminded how much you love your water heater, you want the replacement process to be as quick and painless as possible.

Your water heater is more than 10 years old, and it needs replacing, so you call your local water heater company. They go over the size and fuel type of your water heater and then start talking about the efficiency of all of these options. When we talk about efficiency, we should also talk about cost, which is what’s really going to make a difference in your pocket at the end of the day.

To demystify energy efficiency and water heaters, let’s go over some basics.

Water Heaters – What is the Efficiency Rating?

If you take a look at any water heater, you’ll see a sticker on it that says “Energy Guide.” This sticker will provide you with the annual estimated operating cost for that unit, given on a scale. Where your unit’s rating ends up on that scale is going to tell you how energy efficient it is compared to other models. 

If you’re shopping for a new water heater and want to make comparisons, you can often look up these ratings on the manufacturer’s website. When you find a unit that has a figure on the lower end of the scale, you may want to consider upgrading to one with a higher number because that means that it will use less energy. 

Old vs. New Water Heaters and Efficiency

Traditional water heaters that are more than 15 years old are likely to be much less efficient than new ones. A tank-type water heater has a useful life of about 10 to 15 years, and the unit’s efficiency is going to decline with time. This means that it is costing you more per month to heat the water in your home, often so much so that you’d be better off replacing your water heater to start getting some cost savings. 

One of the things that can reduce the efficiency of a traditional water heater is sediment buildup. Hard water often contains sediments like iron, calcium carbonate, sand, magnesium, and grit. This sediment can settle at the bottom of your tank over time and reduce its efficiency. Likewise, that same sediment can creep into the mechanics of your unit and weaken the tank’s structure, both of which are likely to cause problems. 

You may also be facing efficiency issues because your old tank simply doesn’t suit your family’s needs, causing it to work too hard. If you have a 40-gallon tank that is trying to serve a family of six people, everyone is going to suffer. When your tank isn’t big enough, no matter how old it is, it’s time to think about an upgrade. 

Environmental Impact of Water Heaters

Today’s consumers are more concerned than ever about the environment, and your choice in household appliances matters. There are two things to consider – industrial waste and greenhouse gas emissions. 

First, if you opt for a traditional water heater, this is a large tank that is going to end up in a landfill in one to two decades. To avoid this, you can choose a tankless water heater instead, which lasts longer and has a smaller footprint. 

When it comes to C02 emissions, a solar water heater is going to produce the least greenhouse gasses. However, these systems often require electrical backup, which is the least environmentally friendly option. 

For the average homeowner that has this concern, a tankless system that runs on gas is likely the best choice, followed by a traditional water heater that is gas-powered. Here is some more information about those different types of systems and their levels of efficiency.

Gas Water Heater vs. Electric Water Heater

The primary consideration when replacing your water heater is the current fuel source of the unit. Most people heat their home’s water with natural gas, propane, or electricity. That’s in order of cost, not efficiency. Gas water heaters aren’t as efficient. But, because gas is cheap (and due in part to the design of a gas water heater and the laws of thermodynamics), it’s much more affordable to heat your water with gas than electricity. Consider this:

  • An average home using an electric water heater spends about $500 a year heating its water
  • An average home using a gas water heater spends about $250 a year heating its water

So if there’s one thing you take away from reading this, it’s this: if you have gas, stick with gas. If you don’t have gas, you can always convert, but there are also some newer options that you want might want to consider, like heat pump water heaters, but we’ll get to that later.

OK, I have a gas water heater, are we done yet?

Not quite. Let’s think about three basic options to keep it simple: Standard, Energy Star, and Tankless.

  1. Standard Gas Tank: Most new water heaters have an Efficiency Factor (EF) of .58-.60. That means that 58-60% of the energy that is being used to heat your water is effectively converted into heat. Think of this as the baseline. Some manufacturers make models that are better insulated, and have ratings as high as about .62, which would contribute to maybe $7 or $8 in cost savings per year.
  2. Energy Star Gas Tank: Energy Star certified water heaters currently have a minimum EF of .67, and you’ll find some manufacturers make tanks with ratings from .67-.70. They’re better insulated, have an electrical igniter for your pilot light, and often have a flue damper control. All of these features save on gas costs, and 7-10% higher efficiency means you might see $25-$30 per year in cost savings. If a tank like this is currently getting a rebate in your area, go for it – you might get a tank like this at a similar cost to a standard tank after rebates, and even if you don’t, you’ll probably break even in your first couple of years. Plus, nationwide regulations went into effect in 2015 that require an EF of .67 on all new water heaters, and most rebate programs will expire in 2014.
  3. Tankless: Some people call them tankless, some call them “on-demand,” and others even call them “waterless”… In any case, this kind of water heater is state of the art on heating water with gas. If you’ve been to Europe or Japan recently, you’ve probably seen a lot of tankless water heaters around. While they’ve been in the US for quite some time, most people aren’t necessarily familiar with tankless water heaters and their advantages.

Your main advantages with a tankless water heater are going to be energy efficiency, space savings, longer lifetime (up to 2x as long as a tank water heater), and unlimited hot water. Be careful with that last one – if you’re looking to use endless hot water, you can do this with a tankless water heater – often running multiple showers and your laundry machine simultaneously. But if you do this, it will eliminate the cost savings from a higher efficiency rating.

Assuming you continue to use your hot water as you do now, you have three options to consider:

  1. Non-condensing tankless: Consider this the first generation. These units use a heat exchanger to heat your water on-demand, reach an EF of .82-.85% in most cases, which translates to about $75-$80 in annual savings. Some of the drawbacks of this generation are hot exhaust, which means you have to use stainless steel venting (which is expensive), and lower efficiency when you use a lot of hot water in short draws (i.e., washing your hands).
  2. Condensing tankless: Consider this the second generation. These units use a second heat exchanger to take the heat from your exhaust to further heat the water, resulting in an EF of .92-.94%, which means about $90-$100 in savings per year. The benefit of cooler exhaust is that these can be vented in PVC (which is inexpensive), while the drawbacks included a higher unit cost and a lower efficiency from short draws.
  3. Condensing hybrid tankless: Consider this the third generation. This might be a little bit misleading to call these units “tankless” because they actually incorporate a small – often 2-gallon – holding tank in the unit. Because this small holding tank keeps a reservoir of hot water, the drawback of lower efficiency from short draws is eliminated, meaning that these units reach a consistent efficiency of .92-.96%. This translates to about $120 in annual gas savings– the best in the business.

The main obstacle for a tankless water heater conversion is retrofit costs – from gas line changes to venting changes – but most homes can still achieve a payback of around 10-15 years with these energy savings. After taking into account real estate savings due to a much smaller unit, the payback drops below 10 years.

We’ve estimated these savings based on replacing a standard tank water heater with an EF of .60, and chances are your old water heater isn’t exactly working like it used to, so that’s something to keep in mind. And with a longer lifetime, you won’t have to replace your tankless water heater for another 20 years (as opposed to about 10 years for a tank water heater).

That all sounds fine, but I have an electric water heater.

“$500? No wonder my bills are so high each month!” is what you might have said to yourself when you first read that fact above. The truth is, heating your water with electricity just doesn’t make as much sense as heating it with gas.

From a big-picture perspective, the net efficiency of electric water heating is significantly reduced by the fact that power plants generating electricity and the transmission lines carrying that electricity to your home are terribly inefficient compared to the production efficiency and distribution of gas. Plant efficiency will vary widely, but most electricity generation in the US is 30-45% efficient, resulting in a large amount of wasted energy and negative environmental consequences from the burning of coal and other fossil fuels. In addition, the nature of power transmission is such that between 5-10% of power is lost during the transmission process. Because gas is delivered by pipeline, the losses are negligible.

However, you may be stuck with no gas in your home, so let’s consider the options.

  1. Standard Electric Tank: Typically, electric tanks come with an EF rating of roughly 0.90%. While this rating is comparable to a tankless system in some ways, there are some subtle differences. It isn’t an indicator that you’ll get the same cost savings that you will a tankless water heater powered by gas. With this type of tank, heat is transferred to your water through several elements that are made “red hot.”
  2. High-Efficiency Electric Tank: This type of tank is similar to a standard tank, but it has better insulation. The EF rating on it can be as high as .94-.95%, so it can save you another $10-$15 per year in utility costs. Not a huge difference.
  3. Hybrid Heat Pump Water Heater: This is the game-changer. The one you’ve been waiting for. The tank that’s going to that will reduce your water heating costs by up to $250-$300 per year, with an efficiency rating of 2.0. 200% efficient? How does that work? Remember that the Efficiency Factor is all about energy inputted vs. energy converted to heat for your water.
    A hybrid heat pump water heater preheats your home’s water by using ambient air temperature. So the actual amount of electricity used to heat your water is much lower in proportion to the amount of hot water you get (thanks to the temperature of the air in your garage or basement).

Utility companies and other entities like to support this technology with rebates, so for some, a switch to a heat pump water heater is a no-brainer.

Call Fast Water Heater Today to Find Out More.

Heat pump water heaters have gone through some technological changes as well, which addresses concerns of minimum supported installation locations, sound levels, size, recovery rate, and efficiency. So make sure you check out the difference between brands when choosing a heat pump water heater. This is going to be especially important if you live in a northern state.

Learn more about heat pump water heaters in northern climates.

Those heat pump water heaters sound kind of cool. If I have gas, should I think about switching back to electric?

In short, no. Typically rebates won’t be available to you, and you’ll have to pay for modifications, which will make the switch no longer feasible.

Ok. That was a lot. Can you summarize?

Better education around energy efficiency is important because it helps us understand how the resources we use to generate energy are put to work and the proportion of those resources that we use effectively vs. the proportion that we waste. Heating water with electricity is a three-step process. First, we have to generate electricity using a fuel such as coal or oil. Then, we have to send that electricity over power lines to our homes. And finally, we have to use that electricity to allow an element to heat our water, with energy being wasted at each step of the process.

With natural gas, we simply transport the fuel directly to our homes and burn that fuel in the water heater to heat our water. From an environmental perspective, cleaner-burning natural gas is not only better for the planet, but the way in which it’s delivered to your home creates less opportunity for waste.

Water Heater Type


Efficiency Factor


Approximate Annual Cost


Estimated Lifetime Savings


Standard Tank
.58 – .60
Energy Star Tank
.67 – .70
Non-Condensing Tankless
.82 – .85**
Condensing Tankless
.92 – .94**
Hybrid Condensing Tankless
.92 – .96
Standard Tank
.90 – .93
High-Efficiency Tank
.94 – .95
Hybrid Heat Pump

*These are estimates from extensive in-field testing and monitoring. Not all homes will see these precise savings.
** May experience lower efficiency due to short draws – using hot water for 1 minute at a time or less
***Over a 10-year estimated lifetime
****Over a 15-20 year estimated lifetime
*****Over a 10-year period. Some Hybrid heat pump water heaters have a lifetime warranty on the tank, so savings will be extended.

Armed with an arsenal of knowledge about energy efficiency and water heaters, you’ll be ready to take care of the source of that constant puddle in your garage…Good luck!

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