Types of Water Heaters

Storage vs. tankless; electric vs. gas

Reviews say two specifications tell you the vital information about each water heater. The first-hour rate (FHR) indicates the maximum amount of hot water the model can produce during one hour in addition to the water already stored in the tank. This is important to know so you won't run out of water during your family's period of peak use. The federal energy factor (EF) is a number between 0.50 and 1 that indicates how efficiently the water heater converts fuel into hot water. The higher the EF rating, the better. (Solar water heaters use a rating called the solar fraction, with 0.50 the requirement for Energy Star certification.)

It's relatively simple to use these two specifications to compare two water heaters that use the same fuel. Start by narrowing your choice to the water heaters whose FHR meets your needs, then look for the highest EF rating. It gets more complicated when you start comparing electric water heaters with gas water heaters. Then you have to take into account the utility rates for your area. Our Useful Links section has links to calculators to simplify this.

Prices can be hard to compare because most water heaters are priced regionally, with the same model priced differently depending on where you live. Energy-efficient water heaters often seem to be priced out of range of most homeowners, but local rebates and other incentives can often make them affordable. Reviews suggest checking with your local utility company as well as finding out about state incentives. The federal income tax credits are only the tip of the iceberg.

Water heaters all use some kind of fuel to heat water and make it available to appliances and faucets. They fall into several types, often used in combination:

• Storage-tank water heaters heat water in a tank where it's stored till needed. This is the least expensive type to buy and install, and they are easily the most popular type. On average, they last 10 years (13 for gas models) before the tank leaks and the water heater must be replaced -- but poor maintenance (or bad luck) can shorten the lifetime, especially if the water is hard. Tank-style water heaters are also combined with other types for extra storage or as backups, and a very small tank plus a pump can keep a tankless water heater from wasting water or shooting out cold water. A few more energy-efficient models are available, some of which meet Energy Star thresholds.

• Tankless water heaters heat water only on demand -- as it's being drawn -- to provide unlimited hot water. They last on average 15 to 20 years, but can be repaired for much longer life. Gas tankless water heaters that meet Energy Star thresholds qualify for a 30 percent tax credit (up to $1,500) for 2009 and 2010. Be aware that even gas-fueled tankless heaters require an electrical outlet to power controls. This means that you won't have hot water in a power failure.

• Point-of-use water heaters, also called instantaneous heaters, are small water heaters, tankless or semi-tankless, that provide instant hot water to a specific sink or shower. They're often used in conjunction with a bigger water heater of any of the other types. Point-of-use water heaters are especially useful for faucets located far away from the main water heater, and can minimize water use. (Otherwise, a lot of cold water can flow through the line before the water reaches your preferred temperature.)

• Solar water heaters are the most energy-efficient option, and they add the most to a home's resale value. You can offset costs by taking advantage of a federal tax credit of up to 30 percent of the cost and installation expense, with no limit until 2016. The credit applies to existing homes as well as new construction. Cost-effectiveness depends much more on local fuel costs -- and additional state and local incentives -- than on your area's climate, with a payback period as short as three or four years in some areas. They last indefinitely since they can be repaired.

• Heat pump water heaters use the heat in ambient air to heat water. They can heat water as part of whole-house heating, but the most popular type is an addition to a tank-style water heater to boost its energy-efficiency. GE has announced a hybrid water heater that looks like a standard tank-style water heater, but builds in the heat pump. Heat pump water heaters are an especially good choice for an all-electric house. These qualify for a 30 percent federal tax credit, up to $1,500, for 2009 and 2010.

Tank or tankless?

Storage-tank water heaters are the most popular and least costly type. They are also the least expensive to install. However, they also use more energy than tankless systems, since you're paying to keep the entire tank of water hot until you need it. For many considering going tankless, the big question is whether or not the energy savings will be enough to offset the higher initial purchase price and installation expensive of tankless water heater. Consumer Reports looks at this question in depth, and the quick answer is "probably not." Editors' calculations estimate a break-even period of about 20 years based solely on energy use. However, the federal tax credits for tankless water heaters could shave a few years from the payback period.

Choosing a fuel

Most people replacing an existing water heater will be limited to the fuel type they're currently using, generally natural gas or electricity. But if you plan to stay in your home for 10 years or longer, it could be worth switching water-heater fuels to save money.

Solar has the best rates, obviously -- it's hard to beat zero. In most parts of the United States, natural gas is the least expensive fuel, but some areas have relatively inexpensive electricity, and oil is still a mainstay in the Northeast. Rural areas may not have access to natural gas lines, narrowing the choice to electricity vs. propane or LP gas (which varies in price along with gasoline).

Electric water heaters are less expensive and more efficient than gas water heaters, which lose some heat from the necessary venting. However, natural gas rates are so much lower than electricity rates in many parts of the country that a gas water heater can still be the more cost-effective choice. If you're replacing an existing electric water heater, be sure to figure in the extra installation costs involved in switching to gas. An alternative is to add a heat pump water heater that sits on top of the electric water heater.

The U.S. Energy Administration publishes annual price projections for each of these fuels except fuel oil, forward to the year 2030. Natural gas price projections look the best, projected to gradually decrease till 2021, when they're estimated to start gradually rising again. Electricity rates are projected to rise in 2009 and not return to 2007 prices till 2012. LP gas, which shot up in 2008 along with the price of crude oil, will keep pace with oil in the near term but is projected to gradually decrease till 2017, then start rising again. (Fuel-oil prices, of course, also rise and fall with crude oil prices.)

Note that the Energy Use labels on water heaters are based on the average price of electricity in the United States in 2007: 10.65 cents per kilowatt-hour (kWh). Your local rates may be significantly higher or lower, greatly affecting the cost-effectiveness of a more expensive energy-efficient water heater. In many areas, the payback period is so long that a less efficient budget water heater is a better buy, making good repair service the top priority for choosing.

Quite a few ads for water heaters say they meet current National Appliance Energy Conservation Act (NAECA) standards, but don't explain what this means. Actually, it doesn't seem to mean anything, since all current models have to meet these standards. Instead, reviews suggest comparing the energy factor (EF) specification for the water heaters that have the size and first-hour rate you need.