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Nice hot showers, efficiently!

What Type of Water Heater is Most Energy-Efficient?

Steve Hansen
November 29, 2023

Different Types of Water Heaters

A hot shower is one of the most necessary of luxuries. How many of us would devolve into sloppy, smelly messes if bathing involved cold water? A majority, I bet. Well, for our showers and a few other normal tasks, we need hot water, and for that, we need a water heater. Unfortunately, the typical water heater is a major energy hog, using around 20% of a home’s energy expenditure. That’s second only to home heating for most homes. But you do have more energy-efficient choices.

It’s actually surprising how many different types of water heaters are available, as the marketplace has come up with some different solutions based on people’s needs. If you need a water heater or will soon, here’s some information that may help you find the right fit, as well as links for rebates and tax credits. If your water heater is nearing the end of it’s warranty period (typically 6-10 years), you should consider your next choice. Choosing a massive appliance once it’s an emergency rarely gets you the best deal!

Storage Tank Water Heaters

Tank-type water heaters hold 20–80 gallons of water in an insulated tank. The more insulation, the better, so look for an R-24 tank if you choose this type (R-value is the insulation rating - the higher, the better). You’ll find these units heated by electricity, natural gas, propane, and oil. They’re fairly simple contraptions with a heating element located in the water and a thermostat that turns the element on and off as necessary. Since these units keep hot water standing by and we know hot water will tend to cool, there will be some efficiency loss as the unit periodically reheats the water. That’s why it’s wise to size these units for your family’s usage rather than just oversizing. You can use these guidelines from the U.S. Department of Energy to determine what size tank water heater will work for you. We recommend the electric option where possible.

On-Demand Water Heaters

Also called tankless water heaters, these units pass water through a heat exchanger to rapidly bring the water up to the usable temperature. When you turn on the hot water faucet or the shower, the unit fires up automatically and produces hot water as long as it senses demand. You’ll find these units available in electric, natural gas, and propane models, with a flow rate from 2–11 gallons per minute. The natural gas models will usually provide a higher flow rate than electric models. These units have come a long way in recent years, but they are expensive. However, they are expected to last substantially longer—up to 20 years—than a storage-tank unit, so in that sense, it’s probably worth it.

Tankless models also come as condensing units, which have a second heat exchanger and tend to be more efficient than non-condensing units. Otherwise, not very different.

Now for the efficiency part where you’re saving money day by day: the energy geeks at the U.S. Department of Energy have calculated that if you use up to 41 gallons of hot water daily, having an on-demand unit will be 24–34% more efficient than a storage-tank unit. For households that use a lot of hot water—up to 86 gallons of hot water per day—on-demand units can be 8–14% more efficient than a storage-tank unit. Here’s where you size your tankless unit for your needs.

Tankless units are definitely one of the best options in water heaters, especially now that you can get an electric unit with a flow rate of 7 gallons per minute and avoid having combustion in your home. Plus, you can take a tax credit, which we’ll get to in a moment.

Heat Pump Water Heaters

This remarkable invention doesn’t make heat—which tends to be an energy-intensive process—it moves heat from one place to another. In this case, a heat pump water heater takes heat from the air in the room in which it’s located and transfers it to the water in a storage tank. We’re told that this method is two–three times more efficient than electric resistance storage-tank water heaters. This model from a top brand claims to save $315 per year, so the energy savings will pay the difference over a standard storage-tank unit quickly. I just calculated a five-year payback, roughly, but it depends on the variables. This unit is also a smart unit, so you can use the app to track usage, adjust things remotely, and so on. You can figure out what size you need here.

Heat pump water heaters are another best choice, and they also get a tax credit and possibly a rebate.

Combination Boiler Water Heater

These work well if you use a boiler for your home heating, but that’s not as common as forced air. Radiant heat from boilers is really nice-feeling heat though, especially underfloor heat. The model linked to is 95% efficient, and it’s eligible for rebates and tax credits, so it is a good choice if you have this type of system.

“Niche” and Other Types of Water Heaters

You might see some other types of water heaters listed in articles here and there.

Point Of Use Water Heaters

This is just a water heater of any type that serves one room or one area; things can get a little fuzzy here as you could hook up either a tank or tankless type to serve one or two bathrooms in a wing that’s far from the main water heater, for example. These are helpful when it seems to take 10 minutes to get hot water.

Solar Water Heaters

This idea is interesting in theory but a little difficult in practice. You need some sort of collector to harness the sun's rays and a tank for a fluid (antifreeze) that circulates into your home and then into your water heater, where the fluid transfers its heat into the water. Sure, the sun’s energy is free, but if you have to put all that hardware on your roof, that’s a mess. And when it’s not sunny, or your collectors are covered with snow, you need a backup hot water system.

Coil and Indirect Water Heaters

This method is basically a way to mooch some free heat from your furnace and send it into your tank-style water heater. You’ll have piping running through the furnace, which holds a fluid that heats up when the furnace is running. The fluid offloads its heat into the water in the storage tank water and then recirculates into the furnace.

Show Me the Money!

It’s a good time to be shopping for this type of hardware! As long as you choose ENERGY STAR equipment, you’ll be saving money over old equipment.

ENERGY STAR has a Rebate Finder tool where you just enter your zip code to see what incentives are available in your area. You might also be able to double down with state and local tax incentives in your region. It’s a good idea to check eligibility details before making your purchase.

ENERGY STAR heat pump water heaters are also eligible for a federal tax credit of 30% up to $2,000, which you can learn about here.

Californians also have available to them, you can search what you qualify for here.

So that may be a lot to take in, but after a hot shower, you’ll have it all sorted out.

Editor’s note: If you make a purchase through our affiliate partner links, we may receive a commission. This does not impact the recommendations we make.

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