Water heater basics

Most households need a 50-gallon tank, according to Jeff Haney, a product manager at manufacturer Rheem. That’ll cost $900 to $2,000, installed, depending on which model you choose. Your plumber will put it where the old tank was, with the cold water supply pipe attached at the bottom of the tank and a hot water outlet pipe on top.

Inside the tank, a thermostat constantly assesses the water temperature and fires up a heating mechanism when it falls below the desired setting (120 degrees is standard). When you turn on a hot water tap, heated water flows from the tank and gets replaced by more cold water from the supply line below.

To do this work, water heaters use electricity, oil, or natural gas. Choosing a new water heater that uses the same fuel type as your old unit is the easiest way to keep replacement costs down, says contractor Andy Wargo of Marcellus, N.Y.

What to look for on the label

Within each fuel type, you’ll find a range of models and price points. To compare, look for these key differences, marked right on the label:

First Hour Rating is a measure of how many gallons the unit can produce in one hour (which is more than its tank capacity since it starts making more hot water as soon as you draw some out). With the average shower using 20 gallons of water, a shave using a couple more, and washing breakfast dishes another 5 to 10, a busy family might need an FHR of 60 to 70 gallons to handle the morning rush. Your plumber can help you analyze your needs.

Energy Factor tells you how efficiently the unit operates. The higher the number, the more efficient the unit, and the less it will cost to run. Federal tax credits for highly efficient water heaters expired in 2011, but you can look for state credits and local utility rebates at the Database of State Incentives for Renewables and Efficiency.

Here’s a breakdown of your basic water heater options from the American Council for an Energy-Efficient Economy:

Water Heater Type Installed Cost Yearly Energy Cost Life (years) Total Cost (over 13 Years)
Conventional gas $850 $350 13 $5,394
High-efficiency gas $1,025 $323 13 $5,220
Conventional electric $750 $463 13 $6,769
High-efficiency electric $820 $439 13 $6,528
Conventional oil
$1,100 $230 8 $4,777

High-efficiency gas storage: These are just like standard gas water heaters, but with more efficient burners, better insulation, and other upgrades that make them about 7.5% more efficient, saving the average household about $30 a year. Costs for high-efficiency gas tank water heaters start around $850 (about $175 more than a conventional gas tank unit), plus around $200 for installation (the same as a conventional unit).

Gas condensing: To achieve even higher efficiency, these systems vent the exhaust from the gas burner back through a closed system of coils inside the tank, allowing the water to absorb heat that would otherwise escape up the chimney, explains Potomac, Md., contractor Jay Irwin. That makes them about a third more efficient than conventional tanks, for savings of about $100 a year for a typical household.

Gas condensing units are expensive — around $1,600. And because they produce condensation as the exhaust cools, they need a special drain to discharge the runoff, pushing installation costs up to around $400.

Electric heat pumps: Heat-pump models work like air conditioners, by pulling heat out of the surrounding air. But rather than exhausting the heat outside like an air conditioner, they concentrate it and pump it into the water tank. As a result, they use 55% less energy than traditional electric water heaters. Since these utilize ambient heat in the air, they produce the biggest year-round energy savings in hot climates.

You’ll pay around $1,400, or three times what a conventional electric unit costs, but you could save $300 a year in energy costs, meaning it will pay for itself in about three years.