The average household spends between $400 and $600 annually on water heating, according to Energy Star.

A typical home can reduce water-heating bills by about $115 a year with an energy-efficient non-solar gas tankless water heater. Other kinds of heaters may also be eligible—see Energy Star for details.

The cost of going tankless

  • Expect to spend $1,500 to $2,500, including installation, for a tankless water heater that runs on either natural gas or propane.
  • Costs could go higher if you don’t already have a gas line running to your old heater. Even if you do, you may need to have the line and gas meter upgraded, and possibly enhance your venting, says Mark Petrarca, spokesman for water heater manufacturer AO Smith in Milwaukee.

Payback period

If you’re upgrading to a gas tankless system, payback will take between eight and 10 years, estimates Marci Sanders, senior manager at D&R International, which works with the Energy Star program.

With electric heat pump heaters, it’ll be about three years.

If you have a perfectly good storage tank water heater purchased within the last decade, you can likely save from $20 to $50 on annual energy costs simply by covering your existing hot water heater with an insulating blanket and turning down the heater’s thermostat.