Navigating the New Market

An Overview of High-Efficiency Natural-Gas and Electric Water Heaters

July 01, 2012
July/August 2012
A version of this article appears in the July/August 2012 issue of Home Energy Magazine.
Click here to read more articles about Hot Water

On a routine service call, you find that your client’s water heater is over ten years old and nearing the end of its service life. Your client is looking to lower her utility bill but is unsure what kind of water heater will best suit her family’s needs. The last time her water heater failed, she just bought the latest version of the existing water heater. More recently, she has heard about some of the new products on the market, such as tankless and heat pump water heaters. As her trusted advisor, you have the job of selecting the best water heater for your client. Understanding the benefits and shortcomings of each type of water heater—from the standpoint of energy savings as well as amenities—will help you to choose the right model. This article examines the new market for whole-house gas- and electric-fueled water heaters. An article in a future issue of Home Energy will explore alternative water-heating strategies, including solar-thermal and geothermal water heating.

The GE Geospring is a heat pump water heater. (Rob Cook)

Understanding the Ratings

One of the most opaque aspects of the selection process is navigating the rating system for water heaters. The yellow EnergyGuide labels found on water heaters offer some information about estimated annual energy consumption and first-hour rating, but they don’t really say what these ratings mean, nor do they compare different types of product (for example, tank and tankless) to one another. Nor do EnergyGuide labels help you select the right-size water heater. Let’s take a look at what the ratings on the EnergyGuide label indicate.

Residential water heaters are rated using a metric called energy factor (EF). The estimated annual energy consumption shown on the EnergyGuide label is calculated using EF. EF is nominally the ratio of energy contained in delivered water to the amount of energy used to heat that water, including standby loss. EF is determined by a 24-hour federal test method based on six long draws that total 64.3 gallons, followed by a long standby period. During the test, water heaters must deliver a temperature rise of 77°F (from 58°F to 135°F).

The federal test procedure and accompanying EF rating were developed before the residential water-heating market had diversified. It does an acceptable job of comparing two conventional storage units of the same fuel source (such as electric tank versus electric tank). EF does not, however, provide a very good comparison across fuel sources. Conventional electric-storage water heaters, for example, are typically rated around 0.90 EF, and gas storage water heaters are rated around 0.60 EF. This would seem to suggest that electric water heaters are inherently more efficient than gas water heaters. However, EF ratings are based on site energy use, and about two-thirds of electric energy is lost through generation and transmission. Therefore the rating does not really provide an accurate comparison across fuel sources because it is not a one-on-one comparison. Neither does EF provide a very good comparison across platforms, such as tankless and heat pump water heaters, for similar reasons—these are very different technologies. Therefore, it’s important to understand the strengths and weaknesses of each type of water heater in addition to its EF rating.

The first-hour rating indicates how much hot water a water heater can provide in one continuous hour of use, beginning with a full tank of hot water. A water heater’s first-hour rating is determined primarily by its storage capacity and the capacity of the gas burner, or the electric heating element. When choosing the right-size water heater for your clients, consider how much hot water they will need during peak periods of use, such as in the morning when the family is getting ready for work and school.

Federal law treats commercial and residential water heaters differently. Commercial products are rated by thermal efficiency (TE) and standby losses, which are calculated through two separate tests. TE indicates how efficiently a water heater converts energy into hot water. (For the purpose of selecting a water heater for a residential application, it’s important to know that a TE rating of 90% and above indicates a condensing water heater.)

Residential or Commercial: What Determines the Classification?

Two criteria determine whether a water heater is classified as a residential or a commercial product. The first is heating capacity and the second is tank size. Table 1 lists the criteria for each type of residential water heater that we discuss in this article, and for one type of commercial water heater. Note that product classification is determined by product size, not by intended application. So in some residential applications, a high-efficiency, commercially-rated water heater, such as a condensing storage product, could make good sense. In addition to designating the applicable rating method, these classifications affect a product’s eligibility to qualify for an Energy Star label.

Electric-Storage Water Heaters

Conventional electric water heaters use two electric-resistance heating elements to heat water in the storage tank. Electric-resistance heating is nearly 100% efficient, because electricity is readily turned into heat, but creating heat is not a very effective use of high-quality electricity. Electric-resistance water heating is also expensive—often exceeding $500 a year—compared to about $250 a year for gas or electric heat pump water heaters.

Heat pump water heaters are about 50% more efficient than conventional electric-resistance water heaters. They achieve this high level of efficiency by moving heat from ambient air into water in the storage tank, rather than by heating the water directly with an electric element. They have been coming down in price lately; you can sometimes find one for as little as $1,000. Heat pump water heaters are very cost-effective, with a payback period of around three years.

While heat pump water heaters are rated 2.0 EF and above, field performance can vary significantly depending on climate, installation, and patterns of use. Heat pump water heaters are disadvantaged by the federal rating method, because the 135ºF average tank temperature can be difficult to achieve with the heat pump alone, requiring supplemental electric-resistance heating. For this reason, the heater comes from the factory with a preset temperature of 120–125ºF, so that less electric-resistance heat is needed and rated EF performance may increase.

On the other hand, if they are installed in a space that is cooler than the federal test chamber (about 67.5ºF with RH about 50%), or if they are installed in a conditioned space in a cold climate, heat pump water heaters may not achieve their rated EF performance, and can cause the space-heating system to work harder. But even in less than ideal conditions, field testing has shown that heat pumps outperform electric-resistance water heaters.

Right-sized heat pumps heat water more slowly than electric heating elements, so heat pump water heaters have a slower recovery rate than conventional electric water heaters. As a result, when replacing an electric-resistance unit with a heat pump, it may make sense to install one with a larger storage tank than the one you are replacing, in order to ensure that the heat pump has adequate time to recover from water draws. However, before deciding what size heat pump water heater to install, consider how much hot water your client’s family uses on an average day, as the present tank may already be larger than necessary.

If your client has recently purchased an electric-resistance unit, but wants to increase its energy efficiency, consider installing an add-on heat pump system. Add-on heat pump water heaters can increase the performance of a conventional unit to roughly equal the efficiency of an integrated heat pump. To function properly, heat pump water heaters need a certain amount of space (specified by the manufacturer). Add-ons need as much space around them as integrated units, so be sure there is at least the minimum clearance recommended by the manufacturer where the water heater is installed.

Right Image Figure 1. Tankless and tank water heaters use either gas or electricity as a fuel source.

Right Image The AO Smith Vertex is a high-efficiency, condensing gas storage water heater. (Rob Cook)

Heat pump water heater.

Gas Storage Water Heaters

Thanks to the Energy Star program for residential water heaters and the upcoming revision to residential water heating standards, more high-efficiency, noncondensing storage water heaters with an EF of 0.67–0.70 have come to market, and costs have come down significantly in recent years. At the same time, several manufacturers have introduced condensing storage models that achieve even higher levels of efficiency (around 0.85 EF). Compared to a 0.60 EF conventional unit, a 0.67–0.70 EF water heater can save about 12-15% of annual energy use, and condensing models, about 40%.

Energy Star-qualified gas storage water heaters save more energy than conventional units by reducing heat loss. They do this by using heat traps, induced draft (in some cases), intermittent pilot lights, and better-insulated storage tanks. Condensing water heaters may use these devices as well, but most of the energy savings in these models come from improved heat exchange between the flue gases and the water in the storage tank. As heat is transferred from the flue gases to the stored water, water vapor cools and condenses, releasing latent heat. However, this condensate must be removed, which requires a pump and a condensate line.

When natural-gas prices are low, it can be difficult to justify the expense of a high-efficiency gas water heater on the basis of energy savings alone. But it’s important to remember that natural-gas prices are historically volatile, and water heaters last for around 13 years. In that time, a lot can change. In addition, many gas utilities offer financial incentives to purchase high-efficiency products. If your client uses a lot of hot water, this can make a high-efficiency gas water heater cost-effective in some parts of the country.

There are currently eight models of commercially rated gas storage water heaters that are appropriate for large residential applications. features a detailed listing of these and other high-performance water heaters. These “commercial” products have input capacities equal to or less than 100,000 Btu per hour, which should receive adequate fuel from the ½-inch gas line found in most homes. While they cost more than noncondensing Energy Star-rated heaters, they can be more cost-effective over the life of the unit. For this reason, if your client can afford the up-front cost and needs lots of hot water, a commercially rated unit may be worth the extra money.

There are two main variables to consider when determining the right gas storage water heater. The first is the size of the tank and the second is gas input capacity. If the tank is too small and input capacity is too low, your client risks taking cold showers. On the other hand, if the tank that is too large, not only will it cost more to purchase, but it will waste energy keeping the larger tank warm.

Gas Tankless Water Heaters

Tankless units are becoming very popular, largely because they promise to deliver both energy savings and “endless” hot water. Tankless water heaters achieve very high EF ratings because they nearly eliminate standby losses and perform well on the long, uninterrupted draws used in the federal test procedure (see Figure 1). There is some disagreement over tankless water heater performance in the field relative to storage, but some analysts estimate that tankless units are overrated by 5–10 EF points. The few field tests that have been conducted have found energy savings for tankless units in the range of 30%. On the other hand, lab tests have found that gas tankless units use more water than storage water heaters during typical patterns of water use, which in practice reduces energy savings.

Tankless water heaters are often called instantaneous water heaters (even in federal regulations). In practice, this term better describes storage water heaters, which have a reserve capacity of hot water ready on demand at all times. Gas tankless water heaters fire up only after a certain amount of water has passed through the heat exchanger, which takes about five seconds. Tankless units also require a specific minimum flow rate in order to turn on. This flow rate ranges from 0.5 to 0.75 gpm, which is higher than the maximum flow rate of some efficient faucets. Tankless units shut down when there is little or no water flow, in order to prevent overheating. Combined, these characteristics can produce a “cold-water sandwich” or plugs of cold, when the unit is used intermittently, as in washing dishes or doing various tasks at the bathroom sink. In addition, if your client has a relatively high set point on the water heater and a low-flow showerhead, a small adjustment to the hot/cold water mix could cause the water heater to shut down. It’s important to keep these things in mind when you’re choosing the best water heater for your client.

Since tankless water heaters have effectively no storage capacity, you’ll want to focus on input capacity when choosing the right tankless unit. A tankless unit with too small a burner will fail to keep up with demand. On the other hand, a unit with too large a burner may not be able to modulate the burner low enough for lower flow draws and will not turn on. For these reasons, you should carefully consider how hot water is used in the home when determining the correct-size tankless unit.

There are other things to consider when you evaluate a particular application for a tankless water heater. The ½-inch gas line found in most homes in America can supply up to about 100,000 Btu per hour, depending on supply pressure and pipe length. This is adequate for a small gas tankless unit, but the larger burner found in most whole-house units will require plumbing a new line. This is expensive, and it significantly lengthens the payback period for the gas savings. Even without requiring a new gas line, tankless installations typically require upgraded venting, an electrical outlet, and additional water piping. If a new gas line is needed, it might be worth considering a condensing storage unit instead.

Even though EF ratings may be optimistic for tankless performance in the home, there are still practical reasons to choose tankless in certain applications. In apartment buildings, for example, space considerations may make tankless an ideal choice. Their small size also allows tankless heaters to be installed closer to commonly used fixtures, provided there is access to proper ventilation. This will reduce hot-water distribution losses. Or if your client uses hot water infrequently, you can cut out the standby losses and save some energy by installing a tankless unit with an automatic pilot.

Like storage water heaters, tankless units are available in both condensing and noncondensing models. Condensing tankless models use dual heat exchangers to extract the extra heat from flue gases. As with condensing storage models, you will need to install a condensate line to evacuate the water. Condensing models are more expensive than noncondensing models, but they are a little more cost-effective and can save about 10% more energy.

Hybrid Water Heaters

There are a few products that blur the line between tank and tankless water heaters and that may be better than either one. So-called hybrid water heaters feature a small storage tank and a relatively large burner. These design features eliminate the cold-water sandwich and startup delays characteristic of tankless water heaters. Hybrid heaters also offer the benefit of continuous hot water. Storage tanks in hybrid units range from under 2 gallons to about 30 gallons and hybrid waters heaters come in both condensing and noncondensing models. Because they have large burners and come with a wide range of tank sizes, some hybrid water heaters are rated as tankless products and some are rated as commercial water heaters. Condensing hybrid models can be more cost-effective than either condensing storage or tankless water heaters.

Out with the old . . . (© caraman -

Picking the Right-Size Water Heater

There is no ironclad formula for choosing the right-size water heater for a given application. Table 2 can help you to narrow down an appropriate range of sizes. You should also consider your client’s patterns of use, number of bathrooms, and number of fixtures. All these can influence your choice of the appropriate size. Remember: For storage water heaters, the first-hour rating is determined by storage capacity and heating capacity.

Early Replacement

As with any big purchase, it’s best to plan ahead. If a water heater is over ten years old, it’s nearing the end of its expected service life. Consider replacing it now before it fails, particularly if you are planning on purchasing a high-efficiency water heater. All products discussed in this article require a bit more finesse during installation than conventional products, including power venting, condensate drainage, and possibly more electrical outlets. Not only can these installations cost more up front, but they take longer than conventional installations. For these reasons, it’s better to plan ahead than to find yourself scrambling in a pinch. In addition, most contractors do not stock high-efficiency water heaters on the truck, so you will probably need to request the product you want specifically.

learn more

Visit the Top Ten USA website to find the most efficient water heaters and other appliances:

Bohan, Dave, et al. Actual Savings and Performance of Natural Gas Tankless Water Heaters. Minneapolis: Center for Energy and Environment, 2010.

Puttagunta, Srikanth. Measured Performance of Advanced Water Heating Strategies—Heat Pump Water Heaters (HPWH). Norwalk, Connecticut: Steven Winter Associates, 2011.

Sachs, Harvey, et al. Emerging Technologies and Practices for Water Heating Efficiency as of 2011. Washington, D.C.: American Council for an Energy-Efficient Economy, 2011.

Szann, Aleksander. Water Wastage of Instantaneous Gas Water Heaters.

Barton, Australia: Australian Government, Department of the Environment, Water, Heritage and the Arts, 2008.

Talbot, Jacob. Market Transformation Efforts for Water Heating Efficiency. Washington, D.C.: American Council for an Energy-Efficient Economy, 2012.

Retrofit and New Construction

Retrofit installations tend to cost more than new-construction installations. Putting in new venting, a gas line, and an electrical outlet can add significant cost to installing a high-efficiency water heater. If your client is building a new home, it makes sense to install an efficient water heater, since the lower cost of installation can make even a gas water heater cost-effective. If your client is selling a home, a high-efficiency water heater will help qualify it for an Energy Star home rating, increasing the market price of the home. And while you’re planning for the future, consider prepping a new home for a solar-thermal water heater. The marginal up-front cost during construction can save a lot of money down the road if the homeowner decides to upgrade. Simple additions like rough-in plumbing, a condensate/overflow drain, and proper wiring will make the transition to solar thermal much smoother.

Final Thoughts

Your client’s next water heater is likely to last through the middle of the next decade. Not only is buying a more efficient product now better for the environment, but if utility prices go up, it will save more money than you estimate based on current rates. Before selecting a water heater, carefully consider the range of products available in relation to your client’s home and hot-water use. Matching your client’s needs with a product that is suited to meeting those needs will ensure that your client is happy with the new water heater, and that it will waste as little energy as possible.

Jacob Talbot is a senior analyst in the buildings program at the American Council for an Energy-Efficient Economy in Washington, D.C., and a member of the Atlantic Council’s Emerging Leaders in Environmental and Energy Policy.

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