One of the key characteristics to consider when deciding between several water heater options is the operating cost; the heater with the lowest price tag is not necessarily the least expensive to own in the long term. Operating cost is determined in great part by equipment efficiency, but there are other equally important factors to consider:

  • Energy sources have different unit prices. In the case of heating systems, the input is generally electricity, natural gas, propane or fuel oil. There are also zero-cost energy sources, such as geothermal energy and sunlight.
  • Operating schedules may vary depending on the type of heater. Rated power is not the only factor that determines total energy consumption; the operating schedule must also be considered. For example, tankless water heaters have a high rated power but operate in short bursts, saving energy compared to a storage heater that draws less power but operates continuously, assuming the energy source is the same.

This article will provide a guide for calculating and comparing operating expenses with different types of heaters. After these values are calculated, they can be weighed against the upfront cost of each heating system to find the most cost-effective option.

As with any investment in equipment, considering the total ownership cost is very important when purchasing a heater: to calculate the real heating cost per BTU or kWh produced, it is necessary to factor in the initial investment and any maintenance or reparation expenses. For instance, saying that solar heating is free would not be completely true; although the energy input is free, there are equipment and installation costs, and in multistory buildings a small pump may be required for water to reach the rooftop.

Energy Factor: The Basis for Calculating Heating Expenses

The energy factor (EF) is the ratio of heating output to energy input offered by a heating system. It considers how effectively the heater converts its energy input into an increase in water temperature, but also accounts for other aspects of heater operation:

  • Standby losses – These losses are found in storage heaters, and they represent the heat loss associated with keeping the water in the tank at the desired temperature. Although proper insulation mitigates standby losses, they are impossible to eliminate completely.
  • Cycling losses – These losses occur as water circulates through the heater’s internal piping, and through the storage tank if present.

Heaters running on fossil fuels have energy factors well below unity, electric tankless heaters operate close an EF of 1, and heat pumps have EF values higher than unity because their inverse refrigeration cycle allows them to draw heat from the surrounding environment.

Comparing Water Heaters: An Example

Assume you are presented with four water heaters for a household that consumes 80 million BTU per year, and want to calculate the operating costs associated with each alternative:

  • A gas-fired storage heater with an EF of 0.55
  • A tankless electric heater with an EF of 0.97
  • A tankless gas heater with an EF of 0.80
  • An electric air-source heat pump with an EF of 2.5

Since the example is for New York City, assume the cost of natural gas is $1.20 per 100,000 BTU, and the electricity rate is $0.18 per kilowatt-hour.

  • For the gas heaters, the calculation procedure can be carried out directly because the heating output and energy input are both in BTU.
  • The tankless electric heater and heat pump run with electricity, so the heating output must be converted to kWh before proceeding.
  • Heating Output (kWh)=80,000,000 BTU x 1kWh/3412.14 BTU= 23,446 kWh

Other than this, the calculation procedure is the same for all four heaters. The yearly heating output is divided by the energy factor (EF) to calculate yearly energy consumption, and this value is then multiplied by the unit price of energy, per kWh or BTU.

This formula is applied to all four water heaters, to determine which is the least expensive to operate.

Gas-fired storage heater operating cost:
Operating Cost (USD/yr)=80,000,000 BTU/.55x1.20 USD/100,000 BTU=1745 USD

Tankless electric heater operating cost:
Operating Cost (USD/yr)=23,446 kWh/.97X.18 USD/kWh=4351 USD

Tankless gas heater operating cost:
Operating Cost (USD/yr)=80,000,000 BTU/.8 X 1.20 USD/100,000 BTU=1200 USD

Electric air-source heat pump operating cost:
Operating Cost (USD/yr)=23,446 kWh/2.5 X .18 USD/kWh=1688 USD

Operating Cost Comparison

In this case, the tankless gas heater has the lowest operating cost. The heat pump and gas-fired storage heater follow, although the heat pump wins by a slight margin. The tankless electric heater is the most expensive to operate by far.

Rank Energy Factor (EF) Economic Operation





Heat pump

Tankless electric heater

Tankless gas heater

Gas-fired storage heater

Tankless gas heater

Heat pump

Gas-fired storage heater

Tankless electric heater

Total Cost of Owning and Operating Heaters

The above calculation is only for the operating cost. For a full evaluation, the upfront cost and service life must be considered as well. For this example, assume the following cost and rated life values:

Heater Installed Cost Service life
Heat Pump $1800 15
Tankless electric heater $1500 20
Tankless gas heater $2000 20
Gas-fired storage heater $1200 10

For simplicity, the analysis will be limited to upfront and operation costs. The yearly ownership cost of each heater option would be:

  • Heat Pump Cost = $1688/year + ($1800/15 years) = $1808/year
  • Tankless Electric Heater = $4351/year + ($1500/20 years) = $4426/year
  • Tankless Gas Heater = $1200/year + ($2000/20 years) = $1300/year
  • Gas-Fired Storage Heater = $1745/year + ($1200/10 years) = $1865/year

The tankless gas heater is still the winner in this case, despite its higher upfront cost. The heat pump and gas-fired storage heater have a similar cost of ownership, and the tankless electric heater is very expensive to operate due to the high electricity rates of New York City. However, keep in mind this is just an example, and different results may be obtained for different locations.

Concluding Remarks

To determine which type of heater is the best match for your property, getting a professional assessment is highly recommended. For example, if you don’t have a chimney, the installation cost of any gas heater will increase significantly. Remember that electricity and gas prices also vary by location, and what is true in New York City may not always apply in another city or state.


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