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Are Tankless Water Heaters a Waste of Money?

The energy savings you’ll get from a tankless water heater are usually too low to justify the high purchase price

Posted on Apr 6 2012 by Martin Holladay

Although tankless water heaters are, on average, more efficient than traditional tank-style water heaters, they’re also more expensive — so expensive, in fact, that many potential customers wonder whether their high cost can ever be justified by likely energy savings.

Before you can decide whether to buy a tankless water heater, you’ll need to know how much energy you’ll save. Can you trust the information provided by tankless water heater manufacturers — for example, the estimate from Rinnai’s online calculator that you’ll save $178 per year?

Before I get around to answering that question in detail, suffice it to say: probably not.

Real-world answers from a monitoring study

To figure out the payback period for the incremental cost of a tankless water heater, it would be useful to know:

  • The installed cost of a tankless water heater;
  • The number of gallons of hot water used per day by the average American family;
  • The in-use efficiency of a typical tank-type water heater and the in-use efficiency of a typical tankless water heater;
  • The annual natural gas savings and the annual dollar savings attributable to switching from a tank-type to a tankless water heater.

To find the answers to all of these questions, a group of researchers in Minnesota undertook a monitoring study to measure the performance of tank-type and tankless water heaters in actual homes. The researchers concluded that most tankless water heaters will fall apart from old age before they save enough energy to justify their high cost.

The researchers — Dave Bohac, Ben Schoenbauer, and Martha Hewett of the Center for Energy and Environment in Minneapolis, along with Tom Butcher of Brookhaven National Laboratory and Mary Sue Lobenstein of Lobenstein Consulting — monitored water heaters in ten homes for over a year. Their data have been published in a report, “Actual Savings and Performance of Natural Gas Tankless Water Heaters”.

The ten families enrolled in the study were chosen based on household size. The number of people in these families matched the household size distribution shown in the census data for the Minnesota in 2000: two homes had 1 resident each, three homes had 2 residents, two homes had 3 residents, two homes had 4 residents, and one home had 5 residents.

A total of twenty-four water heaters were installed in the ten homes; each home got at least two water heaters. Eight homes got a tank-type water heater (an A.O. Smith GCV40 40-gallon natural gas water heater with atmospheric venting). In addition, each home got at least one natural gas tankless water heater. Ten tankless water heaters were tested; a variety of models were chosen from among those sold by five manufacturers (Bosch, Noritz, Rheem, Rinnai, and Takagi). The researchers did not test any electric tankless models.

Monitoring equipment for each test set-up included a dedicated gas meter, a dedicated water meter, and temperature sensors that measured the temperature of the incoming water as well as the temperature of the hot water. (The incoming water temperatures varied seasonally by about 30°F to 35°F.)

At each house, researchers adjusted gas and water valves to alternate between the tank-type water heater and the tankless water heater at monthly intervals. Only one water heater was used at a time. The changeover schedule was adjusted at each site so that every tested heater operated over the full seasonal spectrum of incoming water temperatures and outdoor air temperatures. An average of 363 days of useful data were collected from each home.

Installation costs are high

The study found that tankless water heaters cost more to install, and save less energy, than many energy experts claim. “From interviews with eight local contractors, installed costs for whole-house gas tankless water heaters as a retrofit were estimated from $2,000 to $5,000, with typical price range of $2,500 to $3,400. These costs are considerably higher than estimated by others. … For comparison, these same contractors estimated the installed cost of a conventional standard water heater to range from $900 to $1,300, with an average cost of about $1,100.”

Installing a tankless water heater in an existing home is significantly more complicated that swapping an existing tank-type heater for a new tank-type heater. In most cases, the tankless water heater will require a different method of venting — usually double-walled vent pipe through a side wall — as well as a larger gas line, reconfigured water piping, and in some cases the installation of a new 120-volt electrical receptacle.

EF ratings are less than measured efficiency

Among the data gathered by the researchers for each water heater were the following:

  • The temperature of the incoming cold water;
  • The temperature of the hot water leaving the heater;
  • The number of gallons water flowing through the water heater;
  • The amount of natural gas burned by the water heater.

Using these data, it was a simple matter to calculate the actual efficiency of each water heater. The researchers’ efficiency calculations included standby losses but not distribution system losses. The researchers reported, “Across all sites and water heaters, the measured annual efficiency averaged 16% less than the DOEUnited States Department of Energy. EF” — that is, 16% less than the Energy Factor calculated in a laboratory according to a standard established by the U.S. Department of Energy.

The tank-type water heater used in the study (A.O. Smith GCV-40) has an EF rating of 0.60, but its monitored efficiency was only 49% (11 percentage points lower than the EF).

The non-condensing tankless water heaters had EF ratings that ranged from 0.82 to 0.83, but the monitored efficiency of these units ranged from 69% to 78% (about 9 percentage points lower than the EF ratings).

The condensing tankless water heaters had EF ratings that ranged from 0.89 to 0.95, but the monitored efficiency of these units ranged from 62% to 89% (about 17 percentage points lower than the EF ratings).

In their report, the researchers noted two major factors responsible for these low efficiencies. The first factor is that the hot-water draw schedule used in the EF laboratory testing procedure is unrealistic. The test procedure requires six draws of over 10 gallons each at one hour intervals followed by a 19-hour period of inactivity. In the real world, however, only 3% of actual hot-water draws are greater than 10 gallons. In a real home, there are a great many low-volume draws rather than a few high-volume draws.

The second factor is that the EF laboratory testing procedure requires a daily draw of 64.3 gallons, which is higher than the amount of hot water used by average families. In this study, the average daily hot water use per house was 41 gallons.

Tankless water heaters use a significant amount of electricity

Unlike old-fashioned atmospherically vented tank-type gas water heaters, tankless water heaters use a fair amount of electricity. The measured standby electricity use averaged 5 watts; during operation, these tankless gas water heaters consumed between 50 and 80 watts of electricity. If there is any need for the units’ freeze-protection heater to turn on, electricity consumption rises to between 120 watts and 182 watts.

According to the researchers report, “Electricity consumption … accounts for about 5% to 18% of operating costs for tankless water heaters.”

Calculating simple payback

The researchers calculated the simple payback period for the incremental costs of these tankless water heaters. To make the calculation, they assumed that the incremental cost of installing a non-condensing tankless water heater ranged from $1,500 to $2,500. Using these figures, the simple payback period for non-condensing tankless water heaters ranged from 21 to 35 years.

The researchers assumed that the incremental cost of installing a condensing water heater ranged from $2,500 to $3,500. The payback period for condensing tankless heaters (not including the Navien CR-240A, an outlier with dismal performance) ranged from 27 to 38 years.

The Navien CR-240A was in a category by itself. Equipped with a very poorly insulated 0.5-gallon buffer tank, this water heater proved to be an energy hog. The Navien CR-240A (a condensing unit) had energy savings of only $49 per year; assuming that it had an incremental cost of $2,500 to $3,500, the payback period for this unit ranged from 51 to 71 years.

In general, the condensing tankless units weren’t worth the upcharge in cost compared to the non-condensing tankless units. The researchers noted, “On average, switching from a non-condensing tankless water heater to a condensing tankless water heater only increased savings by 3%, which is small compared to the 9% average difference in Energy Factor ratings.”

Should I buy one?

Tankless water heaters have at least two drawbacks: they are expensive and mechanically complicated. They also have at least two virtues: they are compact and can provide “endless” quantities of hot water. For some applications, these benefits are desirable enough to tip the balance in their favor.

As long as you realize that you'll never save enough energy to justify the high purchase price, you may want to buy a tankless water heater for its performance specifications and compact size.

Last week’s blog: “Energy Modeling Isn’t Very Accurate.”

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Image Credits:

  1. John Eisenschenk

Jun 8, 2014 11:07 AM ET

Edited Jun 8, 2014 11:12 AM ET.

Installation costs
by chris stand

I am not sure where/how those installation costs came from - I would love to see the bill rate of the folks who charged $3500 for a condensing tankless heater and what kind of car/truck they drive.

At my house - a 2x10 CCA board mounted to edge of basement wall, 6 foot extra gas line, 6 foot extra cold water feed, 6 foot extra hot water feed - both water lines were 3/4 PEX, 6 inch exterior hole with special vent. Electric line uses the same outlet as the sump pump.
Maybe a total of $300 in "parts" but other than the CCA - which would have been a leak pan when I had a natural gas water heater the costs are identical.

I can not imagine how the external penetration for air feed and exhaust flow could be more expensive then running an exhaust vent through a 2 story house for a "traditional" hot water heater and providing a separate combustion air feed for hot water tank. I have a 96% furnace with no attic/roof penetration.

There are 3 females in my house, we do laundry on weekends, bathe in the morning, run dishwasher in the morning after breakfast and prior nights dishes. Having a big tank of hot water sit idle for 23 hours a day is stupid.

I did not replace my tanked water heater with a tankless entirely to save money - I did it to replace a failing unit and to use less. The "use less" was half of the incentive. According to the attached study a 37% reduction in use was typical. My house will be around for 100+ years. A 37% reduction in use of ANYTHING is an admirable goal.

I do think the ideal setup is a tankless with on-demands at sinks.

Aug 7, 2014 12:59 PM ET

Edited Aug 8, 2014 2:00 PM ET.

Tankless Last Longer
by Jesse Jacobson

A point that the author didn't bring up much is that tankless water heaters can last up to twice as long as a conventional gas or electric water heater (and solar for that matter) and many of the manufacturer's warranties are longer for a tankless brand, which ends up saving money. For example, many tankless water heaters can come with a 15 year warranty (source: warranty info). Where as a traditional water heater is half that. If you consider that a conventional water heater last around 7 years before needing replacement, and a tankless 16 years respectively, then that becomes a great source of savings. Not to mention that you'll be disposing less water heaters, which is good just good sustainability overall.

Aug 7, 2014 1:46 PM ET

Response to Jesse Jacobson
by Martin Holladay

In fact, water heater warranties are all over the map. Rinnai tankless water heaters have a 5-year warranty for parts, except for the heat exchanger, which has a 10-year warranty.

Marathon tank-style water heaters are warranted not to leak for as long as you own your home; other parts have a 6-year warranty.

It's impossible to generalize about water heater longevity. I have seen no convincing evidence that tankless water heaters last longer than tank-style water heaters.

Aug 8, 2014 4:59 PM ET

Edited Aug 8, 2014 5:01 PM ET.

Good Point Martin
by Jesse Jacobson

Warranties are different depending on the brand, but I do tend to see higher warranties for tankless vs tank across different models. However, a well maintained gas or electric tank water heater can last a long time. My last one was 14 years old before I needed to replace it (I did flush the tank semiannually and change the anode rode when it became overly corroded as well as preformed other maintenance). I can't seem to find a definitive study on the longevity of a tankless vs a tank water heater except that Energy Star seems to say the same here:
Though, to be fair, I don't know where they are getting their information from.

Sep 26, 2014 10:48 AM ET

Not a waste of money
by Neal Bowman

I installed a Marey unit in my house. It was stupid easy to install and I could pick the unit up with two fingers. Marey heaters cost less than a traditional water heater and my gas usage went down significantly. So my payback was instantaneous just like the water heating. I've installed them in rental properties and the last thing I want are calls from dissatisfied tenants. One complaint with these things, there's a fairly high pressure drop through the heat exchanger so you'll notice a drop in flow when someone opens a hot water fixture elsewhere. Otherwise, very satisfied.

Jan 18, 2015 6:31 PM ET

Something's not clicking here
by Robert Montrose

A point that no one seems to have brought up is that tankless units have been the standard in Europe for YEARS, long before the 2005-2008 energy crunch that generated increased interest in energy-saving devices. Europe has traditionally had higher energy prices than North America due to a relative lack of domestic fossil fuels. Now the present recession has depressed energy prices worldwide, any savings from efficency become significantly smaller. However, once industry gears back up and consumption rises again, energy prices are almost certain to return to and even exceed their previous record.

Another issue with the study, is that it was conducted in a relatively small geographic area. Western Europe is generally warmer than other places at the same latitude due to the Gulf Stream (hence the big difference in weather between London and Moscow, which aren't very far apart latitudewise). Minnesota is quite a bit colder than most of the US, to the point that the Twin Cities are frequently colder than some parts of Alaska. If the efficency is sensitive to the feedwater temp, then chilly MN would be the low end of the savings range.

Ultimately, I'd suggest that each homeowner should do a case-by-case calculation of the expected return on investment. If the high upfront cost is a barrier to an otherwise profitable decision, consider tapping home equity to finance it, with the savings covering the interest (again, run the numbers to make sure this is the case, otherwise if you sell the house, you may find it difficult to get a buyer willing to pay the extra cost to close out the loan).

Jan 19, 2015 10:29 AM ET

Response to Robert Montrose
by Martin Holladay

You are correct that this article (like most GBA articles) was written from the perspective of residents of North America. European readers of GBA should seek local advice; where tankless water heaters are the norm, as they are in most of Europe, it makes sense to choose the type of equipment that can be purchased and serviced locally.

You are also correct that energy prices have dropped significantly since this article was written. Dropping energy prices reinforce my argument rather than undermining it. As energy prices drop, the argument in favor of tank-type water heaters instead of tankless water heaters is strengthened.

Oct 18, 2015 6:45 PM ET

Tankless water heaters
by Wallace Beckett

It has been brought to the plumbing trade that tankless water heaters also have to be flushed out once a year from a technician with a liquid solution so the coil does not get clogged inside. But they don't know right now of what will that solution do to the coils. So in the long run the use of a traditional water heater tank is the best choice. That is all I install.

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