Did you know that for most homes water heating is the third largest energy expense, accounting for about 15 percent of the monthly electric bill? And if your water heater is more than ten years old, it probably has an efficiency rating no higher than 50 percent. To make matters worse, an old water heater can operate for years at reduced efficiency before it finally fails.
If you are like most homeowners, you will wait until your water heater dies before shopping for a replacement. But you can save yourself a lot of money over time if you do some research first. These tips will help.

Water Heater Efficiency
A water heater’s efficiency is measured by its energy factor (EF). EF is based on recovery efficiency, standby losses and cycling losses. The higher the EF, the more efficient the water heater. We recommend a EF rating of .93 for water heaters under 60 gallons and .91 for water heaters 60 to 120 gallons.
To make the most of the unit’s efficiency, do not install it in an unheated space. Also, try to minimize the piping to your bathroom and kitchen.
When choosing a water heater, it is wise to analyze the life cycle cost — the total of all the costs and benefits during the appliance’s estimated lifetime. Units with longer warranties usually have higher price tags. The least expensive water heater to purchase is generally the most expensive to operate. Be sure to look at the annual cost to operate the unit, found on the energy guide label.
Sizing Your Water Heater
Although some consumers buy water heaters based on the size of the storage tank, the peak-hour demand capacity, or the first-hour rating (FHR), provided on the energy guide label is actually more important. The FHR is a measure of how much hot water the heater will deliver during a busy hour. Before you buy a water heater, estimate your household’s peak-hour hot water demand and look for a unit with an FHR in that range.
Types of Water Heaters
Within the last few years, a variety of water heaters have become available, including conventional storage models, heat pump, tankless (also known as point-of-use), indirect, and solar. It’s also possible to buy a water heater that connects to your home’s space-heating system.