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The first step in choosing a water heater is to determine the appropriate fuel type. Natural gas, oil, and propane water heaters are generally less expensive to operate than electric models. If you are considering electricity, check with your local utility company or electricity supplier to see if they offer off-peak electricity rates. If available, heating your water during off-peak hours will save you money.
If you are in a moderate climate, consider a heat-pump water heater, which is more efficient than an electric water heater. Though a heat-pump water heater may have a high initial cost, it can save up to 50% of your water-heating bill in moderate climates. Heat pumps can be added on to your water heater or purchased as an integral part of a new water heater.
The efficiency of water heaters is indicated by their energy factor (EF), which is based on recovery efficiency, standby losses, and cycling losses. The higher the EF, the more efficient the water heater. Electric resistance water heaters have EFs ranging from 0.7 and 0.95; gas water heaters from 0.5 and 0.6, with some high-efficiency models ranging around 0.8; oil water heaters from 0.7 and 0.85; and heat-pump water heaters from 1.5 to 2.0. Everything else being equal, select a water heater with the highest energy factor (EF). Also look for a water heater with at least one-and-a-half inches of tank insulation and a heat trap.
In the United States, all water heaters are sold with EnergyGuide labels to indicate their energy efficiency. These labels provide estimated annual operating costs, and also indicate the cost of operating the models with the highest annual operating cost and the lowest annual operating cost. By comparing a model's annual operating cost with the operating cost of the most efficient model, you can compare their efficiencies.
Although some consumers buy water heaters based on the size of the storage tank, the first-hour rating (FHR), provided on the EnergyGuide 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 use (your water use during morning showers, for instance) and look for a unit with an FHR in that range.
Demand water heaters are an option that should be considered when replacing a water heater or when building a new home. Demand water heaters only produce hot water when you need it, thereby avoiding the energy losses due to storing hot water. However, they have a low flow rate and may not be ideal for large families.
Tankless coil water heaters use a heating coil installed in the main furnace for water heating. Common in oil-fired boilers and some gas-fired boilers, tankless coil water heaters are an inefficient means of heating water. A better solution is offered by indirect water heaters, which use the main furnace to heat a fluid that is then circulated through a tank of water. The energy stored by the water tank allows the furnace to turn on and off less often, thereby saving energy. If used with a high-efficiency boiler and a well-insulated tank, this can be the least expensive means of providing hot water.
For safety as well as energy-efficiency reasons, when buying gas- and oil-fired water heaters, look for units with sealed combustion or power venting to avoid back-drafting of combustion gases into the home. Finally, it can save you energy and money to put some thought into the best location for your water heater. Whenever possible, do not install the water heater in an unheated basement. Also try to minimize the piping runs to your bathroom and kitchen.
Credits: US Department of Energy (http://www.eere.energy.gov/consumerinfo/heatcool/hc_choosing_water_heater.html)