A water heater's energy efficiency is determined by the energy factor (EF), which is based on the amount of hot water produced per unit of fuel consumed over a typical day. The higher the energy factor, the more efficient the water heater.
When considering a water heater model for your home, estimate its energy efficiency and annual operating cost. Then, compare costs with other more and/or less energyefficient models. This will help you determine the energy savings and payback period of investing in a more energyefficient model, which will probably have a higher purchase price.
Determining Energy Efficiency of Storage, Demand, and Heat Pump Water Heaters
Use the energy factor to determine the energy efficiency of a storage, tankless or demandtype water heater, or heat pump water heater.
The energy factor (EF) indicates a water heater's overall energy efficiency based on the amount of hot water produced per unit of fuel consumed over a typical day. This includes the following:
 Recovery efficiency – how efficiently the heat from the energy source is transferred to the water
 Standby losses – the percentage of heat loss per hour from the stored water compared to the heat content of the water (water heaters with storage tanks)
 Cycling losses – the loss of heat as the water circulates through a water heater tank, and/or inlet and outlet pipes.
The higher the energy factor, the more efficient the water heater. However, higher energy factor values don't always mean lower annual operating costs, especially when you compare fuel sources.
Product literature from a manufacturer usually provides a water heater model's energy factor. Don't choose a water heater model based solely on its energy factor. When selecting a water heater, it's also important to consider size and first hour rating, fuel type, and overall cost.
Calculating Annual Operating Cost
Before you can choose and compare the costs of various models, you need to determine the correct size water heater for your home. If you haven't done this already, see sizing a new water heater. To estimate the annual operating cost of a storage, demand (tankless or instaneous), or heat pump (not geothermal heat pump) water heater, you need to know the following about the model:
 Energy factor (EF) (see above)
 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
OR
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 = $163
For electric water heaters, including heat pump units
You need to know or convert the unit cost of electricity by kilowatthour (kWh).
365 days/year x 12.03 kWh/day ÷ EF x Fuel Cost ($/kWh) = annual cost of operation
Example: A heat pump water heater with an EF of 2.0 and an electricity cost of $0.0842/kWh
365 X 12.03 ÷ 2.0 X $0.0842 = $185
The energy usage per day in the above equations is based on the DOE test procedure for hot water heaters, which assumes an incoming water temperature of 58°F, hot water temperature of 135°F, and total hot water production of 64.3 gallons per day, which is the average usage for a household size of three people.
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 use the table below to determine the cost savings and payback of the more energyefficient model(s).
Models  Price of Water Heater  EF  Estimated Annual Operating Cost 

Model A 



Model B (higher EF) 



Additional cost of more efficient model 


Price of Model B  Price of Model A = $Additional Cost of Model B 
Estimated annual operating cost savings (Model B) 


Model B Annual Operating Cost  Model A Annual Operating Cost = $Model B's Cost Savings Per Year 
Payback period for Model B 


$Additional Cost of Model B/$Model B's Cost Savings Per Year = Payback period/years 
Example:
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 


$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.