Tankless water heaters have become very popular in U.S. households, and for good reason: they offer an increased service life, a reduction in heating expenses and are more compact than their traditional “storage” counterparts. The two key types of tankless water heaters include gas-fired and electric resistance and you should know about the pros and cons of these appliances.

Gas-fired heaters vs. electric resistance heaters

A gas fired tankless heater heats water using a burner within the unit, while an electric resistance heater uses a heating element. Each type comes with specific benefits and drawbacks. 

The primary difference is cost. On an ongoing basis, gas-fired tankless heaters are slightly cheaper than electric tankless heaters. That said, there are many variables that can change that. Firstly, gas-fired heaters require ventilation to exhaust the flue gases. If the building lacks such a system, the cost of upgrading to a tankless gas heater can increase significantly. Secondly, the pilot light used to ignite the burners can require a lot of energy and further erode cost savings. Some models are bundled with an intermittent ignition device (IID) — similar to the spark igniter used by kitchen ranges — which can mitigate the costs.

A summary of several other costs and benefits of the two models is illustrated in Table 1.

Gas-fired vs. electrical: An operating cost comparison

Let’s try to put some actual numbers around the operating cost of the two types of heaters. We can achieve this using the following formula:

Operating cost=(Heating output)/(Energy factor)  x (Unit cost of energy)
Let’s assume the following:
Total heating output = 100 kWh, equivalent to 341,214 BTU
Energy factor (a measurement of a unit’s efficiency. A higher number indicates a more efficient unit):
Gas heater energy factor = 0.60 
Electric resistance heater energy factor = 1.00
Gas price = $3.00/100,000 BTU
Electricity price = $0.18/kWh

Tankless gas heater operating cost

The cost of delivering 341,214 BTU with the tankless gas heater would be the following:

Operating Cost=(341,241 BTU)/(0.60)  x ($3.00)/(100,000 BTU)=$17.06 
Tankless Electric Heater Operating Cost
The cost of delivering 100 kWh with the tankless electric heater would be the following:
Operating Cost=(100 kWh)/(1.00)  x ($0.18)/kWh=$18.00 

Comparison

This shows us that a tankless gas heater is roughly five percent cheaper to run than its electric counterpart.

At this point, it’s worth revisiting the fact that these operating cost figures do not tell the whole story — you must also take into account the installation cost. For example, a gas heater might offer an overall lower cost of ownership if the customer’s building is already equipped with a chimney and a gas connection of adequate capacity; otherwise, the additional upfront cost may negate the savings achieved.

In addition, gas and electricity prices will fluctuate over a 20-year period, and technological innovation may dramatically alter the cost profile of these items.

Advantages of tankless water heaters vs. storage water heaters

Tankless water heaters offer myriad advantages over storage water heaters, the most significant of which is cost savings. Water heating can represent up to 18 percent of energy expenses in the average U.S. household, and tankless heaters are far more efficient, resulting in an energy savings of up to 34 percent. This translates into roughly $100/year of savings. 

Most of the savings are due to the fact that there is no need to maintain the temperature of a water reservoir, and hence standby power consumption is dramatically reduced.

Additionally, due to the lack of a water tank, tankless water heaters require very little space. The tank is typically the largest component of conventional water heating systems. This can make tankless heaters particularly well-suited for small apartments or other places where space is limitation.

The lack of a tank also affords a high degree of flexiblity in terms of installation layout. Since storage tanks are not required, installing multiple units at several points of use is a feasible approach. Using multiple units further optimizes the heating output, which may result in energy savings of up to 50 percent.

Lastly, tankless heaters offer a service life of 20 years or more, while tank-based models typically last between 10 and 15 years. Since a long service life delays decommissioning and replacement expenses, tankless heaters offer a reduced cost of ownership despite the higher initial expense.

Disadvantages of tankless water heaters 

There are several key disadvantages of tankless water heaters. The first results from the fact that utility companies charge higher rates for electricity when the power grid is subject to peak demand. The goal of this is to incentivize consumers to shift their electricity usage to hours when there is less load on the grid. With tankless electric heaters, this is not possible, so if hot water is needed during peak demand hours, there is no option other than consuming expensive electricity. 

Secondly, central tankless heaters are characterized by their high upfront electricity cost, since they require a lot of power to heat water instantaneously. Storage water heaters, on the other hand, can heat water over a longer period thanks to the presence of a tank, reducing the need for instantaneous power consumption.

A simple financial projection: storage vs. tankless water heater

Let’s crunch some more data, and calculate the dollar savings of a storage heater vs. a tankless water heater. Assume the following options are available (new residential construction):

A storage heater with an installed cost of $900 and a service life of 10 years.

A tankless electric heater with an installed cost of $1,700 and a service life of 20 years, offering savings of $100/year compared with the storage heater.

The tankless heater costs $800 more upfront but provides a net savings of over $2,000 during its 20-year service life, primarily because it enables the homeowner to avoid the cost of a new storage heater after 10 years of use. 

The graph above illustrates the total lifetime savings achieved with the tankless water heater mentioned in this example:

Notice how the initial investment is recovered by year 8, and then savings build up steadily over the tankless heater’s service life. The 11th year has the highest savings, since the cost of a new storage heater is avoided.

Alternative options

Tankless water heaters offer a stellar balance between upfront cost and efficiency, but there are other heating options which may be superior, depending on the customer’s situation.

The first is a heat pump, which can save the average U.S. household $300 per year — three times the average savings of tankless heaters. In addition, heat pumps can be equipped with energy storage to achieve both energy efficiency and convenience with the same device. 

Solar collectors are another option that outclass tankless heaters in terms of savings: they have the highest upfront cost among all heating systems, but they essentially offer free heating after the initial investment has been recovered. Another advantage of solar water heaters is that they qualify for a federal tax credit equivalent to 30 percent of their cost, regardless of whether they’re used for a residential or commercial construction.

Of course both heat pumps and solar collectors come with their own set of advantages and disadvantages, which are beyond the scope of this article.

Conclusions

A tankless water heater can save the average U.S. household more than $2,000 during its service life, while lasting longer than most other alternatives. Whether an electric or gas powered model is preferable depends substantially on the current conditions of the building, and other situation-specific factors.