How to Determine Energy Savings and Payback Period

When you are thinking about having a water heater installed in your home, you obviously need to choose what model heater that you want first. Whether you are considering a traditional storage water heater, an on-demand, or tankless, water heater, or a heat pump, the U.S. Department of Energy has provided a formula you can use to estimate the annual operating cost of the heater you are considering. Then, using the formula, you can compare the typical costs to operate a water heater with other models that are more energy efficient and less energy efficient. That way, you can identify the payback period and the energy savings associated with purchasing a more energy-efficient water heater. That kind of water heater will more than likely cost more.

This formula is only helpful if you have already determined the right size water heater for your home. That information can be found in a previous blog posting on our Approved Comfort website.

The Department of Energy formula is based on the average water usage of a household of three people, which is 64.3 gallons per day. In order to be able to make an accurate determination of the annual cost of the storage, tankless or heat pump model (the formula does not work for a geothermal heat pump) you are considering, you need the following information:

  1. Energy factor (EF)
  2. The type of fuel you are using and its cost (this can be provided by your local utility)

Then make the following calculations:

Energy factor (EF)

Fuel type and cost (your local utility can provide current rates)


Then, use the following calculations:

For gas and oil water heaters

You need to know the unit cost of fuel by Btu (British thermal unit) or therm. (1 therm = 100,000 Btu)

365 X 41045/EF X Fuel Cost (Btu) = estimated annual cost of operation


365 X 0.4105/EF X Fuel Cost (therm) = estimated annual cost of operation


Example: A natural gas water heater with an EF of .57 and a fuel cost of $0.00000619/Btu

365 X 41045/.57 X $0.00000619 = $163

For electric water heaters, including heat pump units, you need to know or convert the unit cost of electricity by kilowatt-hour (kWh).

365 X 12.03/EF X Electricity Cost by kWh = estimated annual cost of operation


Example: A heat pump water heater with an EF of 2.0 and a electricity cost of $0.0842/kWh

365 X 12.03/2.0 X $0.0842 = $185


Comparing costs and determining payback

Once you know the purchase and annual operating costs of the water heater models you want to compare, you can determine the cost savings and payback of the more energy-efficient model(s).


Comparison of two gas water heaters with a local fuel cost of .60 per therm.

Models Price of Water Heater EF Estimated Annual Operating Cost

Model A $165 .54$166

Model B $210 .58$155

Additional cost of more efficient model

(Model B) $210-$165=$45

Estimated annual operating cost savings (Model B) $166-$155=$11 per year

Payback period for Model B $45/$11 per year = 4.1 years

Other costs

If you want to include installation and maintenance costs, consult the manufacturer(s) and a qualified contractor to help estimate these costs. These costs will vary among system types and sometimes even from water heater model to model