How Water Heaters Work and What They Cost Your Monthly Utility Bill

A look at how water heaters eat up your energy bill month after month
How Water Heaters Work and What They Cost Your Monthly Utility Bill

Did you know water heating is the second most significant expense in your home, accounting for 18-20% of your utility bill? What’s even more alarming is homeowners will spend an average of $600 per year on heating water they most likely will never use. 

If you’re in the market for a new water heater, a good starting point is learning more about how water heaters work, how much they cost, and what makes them energy-efficient. You’ll find answers to these common questions here. Let’s start by looking at a water heater’s functionality. 

How water heaters work

Before we dive into how water heaters work, it’s worth noting there are several types out on the market. They all have different features and vary by fuel type, and the seven most  commonly known water heaters types are: 

  • Combined Space and Water Heating System with a Hydronic Boiler

  • Combined Space and Water Heating System

  • Solar Powered Water Heater

  • Heat Pump Water Heater

  • Condensing Water Heater

  • Traditional Storage Tank Water Heater

  • Tankless Water Heater


The most commonly used water heater type is a traditional storage-tank water heater. One of the prominent features of a conventional water heater is its storage tank feature. This water heater can store anywhere from 20-80 gallons of hot water, depending on its size. 

What appeals to most homeowners about conventional water heaters is the price. They are much less expensive to purchase and also much easier to install.  The cost of labor for maintenance and repairs is reasonable compared to its competitors, making it even more attractive.

A limitation to buying this kind of water heater is its size. The amount of water a heater can store significantly depends on its size. The amount of water needed is relative to the number of people living in the home as it determines the proper size required to meet hot water needs for any given family. 

Another drawback to the size of traditional water heaters is the length it takes to refill the tank once it’s run out of water. This process can take an hour or more to fill and heat up. It can be an inconvenience when waiting isn’t ideal. 

Some buyers might consider the lifespan of conventional water heaters short, lasting anywhere from 10-15 years. If your unit is presenting performance issues, it might be time to upgrade it even if it hasn’t reached its total life expectancy. 

How much do water heaters cost? 

The average cost to replace a water heater is $1,200, but that can vary depending on the unit type, size, labor, and fuel source. Let’s look at a comparison chart to get a comprehensive understanding of cost. 

New water heater cost by type 

Apart from considering what replacement costs are for a new water heating system, buyers should examine annual operating costs before committing to any one unit. 

Although some heaters might seem more energy efficient upfront, if you have the wrong size for your family or the wrong type, you could end up paying more on the backend. 

The office of energy and efficiency & renewable energy has a great tool that helps homeowners calculate how much energy a unit consumes and what that total comes out to annually. 

Remember, different fuel types might cost considerably less than others, like natural gas compared to electricity. Weigh out all options to make the best choice for you and your family.  

What makes a water heater energy efficient? 

Across the United States, we use more than one trillion gallons of water each year just for showering. When you factor in all other hot water needs at scale, you start to get the bigger picture. Heating water takes up a lot of energy. 

As technology has evolved, so have different fuel-type water heaters giving homeowners the ability to become more energy efficient. But what does energy efficiency mean? 

Efficiency is about the energy a given appliance takes in versus the amount it puts out. Homeowners could be saving hundreds of dollars per year on utilities by assessing the energy input versus output of their current water heater. 

All water heaters have an efficiency rating informing buyers how energy efficient a heating system is. Heating systems come with an Energy Guide label indicating the annual operating costs associated with that particular unit. 

Energy guides score heating systems on a scale where a lower score indicates lower energy efficiency and a higher score means high energy efficiency. Some Energy Guide labels have an Energy Star mark, a government-backed symbol for energy efficiency that protects the environment and saves money. 

Homeowners want to look for the Energy Star label whenever possible as reassurance that their purchase decision will help save money and lessen their emissions in the long run. 

When homeowners upgrade, they want to upgrade to a water heater unit with a higher efficiency rating than previously owned. It assures buyers they are moving in an energy-saving direction and buying a model that will indeed make a difference.

More on water utilities 

It takes a lot of energy to transfer every gallon of water you use from a drinking water source to a sewage treatment plant to make it drinkable. After the water leaves the water treatment plant, more energy is needed to transport it through water pipes to your home.

Energy is needed to heat the water before it reaches the tap. Here is something to consider: the energy required to purify and deliver the water that only ten households use per year could power your home refrigerator for six years!

Besides using water for our daily needs, water is also used to cool the facility plants that generate the electricity we use each day. Hence anytime your television, computer, or lightbulbs use energy, water is getting used up too. Turning off your lights means saving water and energy! In fact, it takes anywhere from 3,000 to 6,000 gallons of water to power one light bulb left on twelve hours daily for an entire year. 

Ways to lower your bill 

To reduce how much electricity or gas your hot water uses and lower your monthly bill, consider the following tips:

    1. Install PowerX Water Heater sensor in your home: PowerX revolutionises how your water heater works. Optimizing its output for maximum savings, keeping track of potential maintenance issues and alerting you to leaks and other hazards in real time. PowerX Water Heater sensor learns just how you like your water and automatically adjusts the temperature and heat cycle times to optimize usage. Drastically reducing water consumption, power use, and your utility bill.
    2. Upgrade to a more energy-efficient water heater: Manufacturers are constantly improving the energy efficiency of products used around the home. When the time comes to replace your current water heater, you’ll be able to save more money annually by investing in a model with the Energy Star label.  
    3. Find the right water tank size for your home: Your water heater needs to be big enough to handle the busiest hours of the day in your home but not big enough to waste energy heating water you don't need. See the Department of Energy's guide for sizing a new water heater to calculate how many gallons you will need in an hour and find a model with a suitable rating for the first hour. 
    4. Cut down on your shower time: A warm shower after a long day is comforting for many people; however, the amount of water used during a 20-30 minute shower might surprise you. Consider keeping your shower to a minimum, and instead of suffering through cold showers, turn your water off when you’re not actively using it. Lathering can be done with your water shut off to help keep water consumption to a minimum.  
    5. Turn down the thermostat: The factory settings for most water heaters are set at 140 degrees. High temperatures like these are great if preventing scalding is your goal, but it’s worth noting; changing the water heater temperature down to 120 degrees can be just as efficient. Going any lower than this can result in problems with bacteria in your water. 
    6. Add insulation to your tank: Insulation blankets are a great and inexpensive way to lessen the amount of energy your water heater uses to heat it again. Since insulation blankets help water heaters retain heat, you can start seeing improvements after only a few times of use.
    7. Use your dishwasher instead of handwashing: It’s true that while dishwashers use their share of energy, they tend to use less hot water than hand washing, especially if you have a highly efficient model. Waiting until you have a full load of dishes to operate will help your efforts. 

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