Because electricity is much more expensive per Btu than gas, electric water heaters are typically more expensive to own and operate, over their lifetime, than gas water heaters. Despite this economic disadvantage, there are four reasons why someone would select an electric water heater instead of a gas heater:

• Lower initial cost. Because they don't require combustion gas vents, electric water heaters are usually less expensive to purchase and install.
• Ease of installation. Electric heaters can be installed in locations in which it would be difficult or impossible to install a combustion gas vent.
• Safety. Electric water heaters don't require combustible fuel, which can leak or explode. They don't have pilot lights that can ignite flammable vapors. And they don't produce carbon monoxide, which can backdraft into occupied spaces.
• Flexibility. Not all buildings have gas supplies, but nearly all buildings have electric supply.

Given these reasons, it's not surprising that about half of all commercial buildings in the U.S. use electric water heaters. And owners of electric water heaters have several alternatives available that help mitigate the higher operating expense associated with electric water heating.

Residential heaters. Even though they are designed for the residential market, these water heaters (see Figure 1) can be appropriate for many small commercial facilities—and even some large facilities. These water heaters, which are available with tank sizes ranging from 20 to 120 gallons, and which typically have 4.5-kilowatt (kW) electric resistance elements, are manufactured in large quantities. As a result, they are relatively inexpensive and widely available. The term "energy factor" is used to express the efficiency of residential heaters. It represents the amount of heat required to warm up a year's worth of hot water for a typical home, divided by the amount of electric energy input into the heater to warm that water. The higher the energy factor, the more efficient the heater. Because electric resistance elements are nearly 100 percent efficient, the efficiency of electric water heaters depends on how well they are insulated. Residential heaters are available with energy factors that range from 0.80 to 0.95. To determine the energy factor for a particular water heater, either obtain it from the manufacturer's literature or look it up in the Gas Appliance Manufacturers Association's Consumers' Directory of Certified Efficiency Ratings.

Commercial heaters. Water heaters designed for the commercial market are available in a nearly unlimited range of tank and electric resistance element sizes. Manufacturers provide tanks that range in size from 5 to 1,000 gallons and have electric elements with inputs ranging from 3 to 162 kW. Unlike residential heaters, commercial heaters are not rated for overall efficiency. Instead, national standards govern their "standby loss," which represents the portion of the stored energy that is lost through the walls of the tank. Standby losses are typically not published by the manufacturer but can be obtained from the manufacturer or found in the Gas Appliance Manufacturers Association's Consumers' Directory of Certified Efficiency Ratings.

Off-peak heaters. If you pay large electric demand charges, or if you are charged much lower rates during off-peak hours, you may benefit from installing an off-peak heater. These heaters differ little from ordinary electric water heaters, except that they incorporate much larger storage tanks and controls that only allow the electric resistance elements to operate during off-peak hours. Although these heaters take advantage of lower off-peak rates, they incur much greater standby losses, as their storage tanks must be large enough to carry them through the entire on-peak period. Usually, these systems are only cost-effective in locations where there is a large premium associated with on-peak power.

Heat pump water heaters. In water heating applications, heat pumps use refrigeration equipment to remove waste heat from indoor air or exhaust airstreams and transfer it to hot water storage tanks. The initial cost of a commercial heat pump water heater is much greater than that for an electric or gas-fired boiler, but the annual energy savings are so large that paybacks are often just a few years. Because heat pump water heaters produce cool, dry air as a by-product of heating water, the best applications are those that can take advantage of both outputs simultaneously. Consequently, heat pump water heaters are especially well suited for commercial-sector applications where the demand for hot water is relatively constant and the need for cooling or dehumidification is continuous. For more information, see the topic "Heat Pump Water Heaters."

Determine your building's fuel availability. Electricity is widely available in U.S. buildings. Other fuels, such as natural gas, may also be good options if they are available. If more than one type of fuel is available, use the different fuel costs in calculating life-cycle expenses to determine the most cost-effective choice (see below).

Pick a size that's just right. Sometimes, plumbing contractors oversize water heaters so they can quickly specify a model they know will keep up with demand. That's bad news for customers who have to live with those water heaters, because an oversized heater is less efficient and more expensive than an accurately sized one. To make the best selection, calculate the "peak one-hour draw," following the procedure from the American Society of Heating, Refrigerating and Air-Conditioning Engineers' Applications Handbook or the U.S. Department of Energy's Consumer's Guide to Energy Efficiency and Renewable Energy. This quantity represents the greatest amount of hot water that is likely to be required over the course of a single hour. It is dependent on the tank size and heating element capacity. Once you've calculated this amount, find a water heater whose "first-hour rating" matches your need, within a few gallons. Alternatively, several water heater manufacturers provide free software from their web sites that sizes water heaters.

The only time that an oversize water heater may be appropriate is when there is a large premium associated with on-peak power. Make the storage tank larger, and you can reduce the heating capacity. That reduces peak demand, but at the expense of greater standby losses. The most advantageous relationship between storage and heating capacity varies depending on electric rates and hot water usage patterns. To find the best combination, analyze a few different models and compare their first costs to their annual operating expenses.

Compare life-cycle costs. To calculate life-cycle costs for a product, sum the first cost of the water heater and the annual operating cost multiplied by the expected life of the water heater. The operating cost is the energy cost plus expected maintenance costs, if known. To calculate the energy cost, multiply the estimated annual energy use on the EnergyGuide label by the local electricity rate.

Because of its design, a conventional electric tank-type water heater offers few opportunities for efficiency and performance improvement. These opportunities do exist with newer alternative electric technologies, such as heat pump water heaters and electric tankless water heaters. Both of these technologies offer reduced energy costs; tankless units can also offer greater capacity and, if installed at the point of use, quicker delivery. See the topics "Heat Pump Water Heaters" and "Tankless Water Heaters."