How to Save Money When Buying Heating, Cooling and Hot Water Heat Pump

How to estimate your savings

For most American homeowners, one of the best ways to save money and energy is to switch to an electric heat pump for space heating and cooling.

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Because of the very clever way heat pumps work, these heating and cooling machines are anywhere between 2-4x more efficient than traditional furnaces and boilers. But like the cost of a heat pump, the actual amount of savings varies significantly between homes.

In this article we'll help you estimate how much you can save by switching to a whole-home heat pump or mini-split system.

What determines how much you can save?

The average household in the United States can save $370 per year by switching to a heat pump. Homeowners switching from inefficient systems that run on fuel oil, propane, or traditional electric resistance (like baseboard heat or electric furnaces) can save closer to $1,000 per year.

As with other energy upgrades like improving your home insulation, your annual savings will vary. Here are the factors that impact savings the most:

1. The size of your home

More square footage means a bigger energy bill. And the more you currently spend the more you will save by switching to a heat pump. Though, as covered in our heat pump sizing article (link needed), you'll also need a larger system, which costs more upfront.

2. Your local climate

Heat pumps work in both warm and cold climates. But people living on the East Coast (and especially the Southeast) will save the most due to the large number of homes that use inefficient electric, fuel oil, and propane heating systems.

One common myth you'll hear is that heat pumps waste money when the temperature drops. In the past this was true, but today's best cold climate heat pumps work efficiently down to very low temperatures. And many homeowners living in cold climates currently use fuel oil and propane to heat their home, two very inefficient fuels.

That's why, somewhat surprisingly, people living in cold states like Maine, Ohio, Pennsylvania, New York, and Massachusetts can save a lot of money every year by making the switch.

3. How energy efficient your home is

If your home is poorly insulated then you probably spend a lot of money to heat and/or cool your home. And that means more opportunity for the heat pump to work its magic.

4. How you currently heat your home

Rewiring America has crunched the numbers using data from the National Renewable Energy Laboratory (NREL) to help homeowners better understand how much they can save by switching to a heat pump.

While there's a lot of variation based on the different factors above, we calculated the national average savings for households, depending on their current heating fuel:

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Interest in electric heat pump water heaters is taking off, due in large part to their superior efficiency, tremendous energy savings and greenhouse gas reduction potential. An ENERGY STAR certified heat pump water heater is typically at least 3-4 times more efficient than standard electric and gas models. As a result, a family of four could save nearly $550 per year in energy costs compared to a standard electric water heater. Those savings translate into average payback periods (compared to purchasing a traditional electric water heater) of 3-6 years and thousands of dollars in savings over the product's life. New federal tax credits and local incentives for heat pump water heaters are making the opportunity to change even sweeter. 

While installing a heat pump water heater is generally more expensive than purchasing one of the standard alternatives, they are eligible for a range of current and upcoming incentives that make this smart energy choice more affordable. Federal tax credits established by the Inflation Reduction Act cover up to 30 percent of the unit and installation costs (up to a total tax credit amount of $2,000). In addition, many electric utilities and municipalities offer incentives for purchasing a heat pump water heater, typically ranging from $300 - $1,000. Finally, state rebate programs, another component of the Act, are expected to launch in late . 

Water Heater Replacement

Traditional storage water heaters have an expected lifespan of between 10 and 12 years. In contrast, heat pump water heaters are typically cited as lasting between 13-15 years. When considering a heat pump water heater, we recommend that you proactively plan to replace your existing water heater. This can save money and the added headache of cleaning up a leaky tank and/or footing the bill for an expensive emergency contractor call. Getting multiple quotes in advance can also help you identify a contractor who has experience working with heat pump water heaters and can cue you in to other considerations that may need to be addressed as listed below.

More than 80 percent of water heaters found in homes today are one of two types: standard electric resistance storage water heaters and natural gas storage water heaters. If you're not sure which type you have, look at the top of the unit. If there is a 3-4' round exhaust vent or flue protruding from the top for ushering combusted gases out of the home, it's safe to assume that you have a natural gas (or perhaps, propane) storage water heater. If your unit does not have a 3-4" round exhaust vent or flue protruding from the top, you more than likely have an electric resistance storage model.

Tip: Many installers appreciate a photo or two of your existing water heater and the space around it to assess any hurdles or first steps to prepare your home for an installation. With this information at hand, some may even offer quotes without the need for an in-person appointment.

Replacing a Standard Electric Water Heater

If you are replacing a standard electric storage water heater with a heat pump water heater, the per unit cost for a new heat pump water heater typically ranges from $1,500 to $3,000 (not including applied tax credits, rebates, and/or utility incentives), though some 'split-unit' models (which become a consideration if your space is constrained) can cost several times more. The tank size is one of the most important factors in determining cost. Heat pump water heater tanks range in size from 40 to 80 gallons, with larger tanks typically landing on the more expensive side.

Note: You should not select tank size based on cost. It is important to size correctly, and sizing recommendations for heat pump water heaters can differ from gas and even from standard electric. You may want to size up in many instances, particularly when replacing a gas unit.

Expected costs for materials and labor to install a heat pump water heater can vary widely due to several considerations. A recent informal survey of contractors revealed labor and material estimates ranging from $1,000-$3,000, in addition to the cost of the unit. Some experienced installers charge a flat rate for installation, though most rely on an hourly rate plus materials approach.  

A general rule of thumb is that the installation cost may be roughly equal to the cost of the water heater itself, however, there are a variety of factors that will play into each individual installation cost structure. Considerations that are likely to impact installation pricing include:

• Local plumbing and/or HVAC labor costs.
• Condensation management: Heat pump water heaters capture moisture from the surrounding air in the form of condensate. In traditional mechanical rooms and garages, this water can be routed to a floor drain. In other locations, condensation management will need to be addressed by a contractor and may add an additional cost to installation. Note: The condensation is pure, neutral water, unlike the discharge from some other mechanical equipment, so it can go right into existing drains.
• Air Space: Heat pump water heaters do not require venting off the unit top as there are no combustion products to release, but they do require at least 450 cubic feet of surrounding air space, which is roughly the available space within an 8' x 8'utility closet, to ensure proper air flow across the heat pump (Note: Always refer to individual product space requirement specifications. Some manufacturers may recommend additional airspace.)  Alternatively, smaller enclosed space may be suitable for a heat pump water heater when paired with a louvered door to allow for additional air circulation. Carpentry work, such as installing a louvered door may increase the cost of a heat pump water heater installation.
• Venting: Just as refrigerators and freezers emit warm air from the sides, rear or top during normal operation, a heat pump water heater extracts warmth from the surrounding air (even at temperatures below 40F) and emits cooler air. In some cases, homeowners may want to vent this cooler air to an adjoining space. Most manufacturers have venting kits available for an additional fee.
• Sound management: Heat pump water heaters have become quieter in recent years, with most new models generating between 45 and 60 decibels (db) while running - roughly the quiet hum of a kitchen refrigerator (45 dB) or, on the other end, a modern window AC unit (60 dB). (Note: not coincidentally, refrigerators and air conditioners use the same condenser technology as a heat pump water heater). Consider whether this noise level would affect the surrounding environment when utilizing a setup with louvered doors. Make sure to find a location where this noise would not cause a distraction. Manufacturers also offer sound reduction kits if necessary.
• Orientation: The hot and cold-water lines need to enter the heat pump water heater at certain locations on the unit, and the heat pump fan or blower needs to have adequate access to the surrounding air. While some units can be installed with zero clearance on the back - meaning they can be placed directly against a wall - you must correctly configure the unit's orientation, so follow the installation instructions provided. The flow of air does matter for the unit to operate at optimal energy efficiency.
• Thermostatic mixing valve: Some local plumbing codes and utility programs may require installation of a thermostatic mixing valve with a new water heater.
• Additional electrical permitting: May be required by local code.

Contractors accustomed to installing heat pump water heaters are often more willing to offer fixed pricing and/or lower installation cost estimates than those less familiar and perhaps hesitant to install a product they have not previously installed. Visit ENERGY STAR's Heat Pump Water Heater and Installer Finder to locate contractors with experience in your vicinity.   

Replacing a Gas or Propane Storage Water Heater

When replacing a fuel-based water heater, there are additional considerations associated with installing an electric heat pump water heater. These include:

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• Electrical service capacity: If you are switching from a fuel-based water heater, you may need to expand the electrical capacity of your home at the breaker box. A contractor should be able to tell you whether an upgrade is required and how much it will cost.
• Sealing of vent penetrations: Fuel-based water heaters have pipes or ducts that vent to the outdoors. Heat pump water heaters do not vent outside, so those penetrations need to be sealed. Sealing entry points helps reduce air leakage and makes a home more energy efficient, so it is a win-win!
• Electrical availability: Besides confirming that your home's electric panel can support the additional load of a heat pump water heater, a 240-volt electrical supply needs to be available at the local site of the installation. Additional electrical work, like running dedicated conduit from the breaker box, may be necessary if the proper wiring is not available near the installation location.
• Proper sizing: Each unit needs to be sized properly according to the individual manufacturer's specifications. Usually, when switching from a gas to a heat pump water heater, you will need to size up - for example, from a 40-gallon to a 50-gallon or from a 50-gallon to a 65-gallon - to ensure that recovery time between significant use events is not compromised.  
• Capping the gas: When converting from gas to a heat pump water heater, the installer must also cap the gas line at some point leading up to the water heater. The cost for doing so, though, is typically nominal. 

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