Home Electrification (Part 5): Selecting a High Efficiency, Heat Pump Water Heater

Author: Wei-Tai Kwok, Past President, Sustainable Lafayette (weitai[at]sustainablelafayette.org)

Article published November 26, 2020. Sanden unit installed in Summer 2019. Incentives updated June 2023. Watch January 2022 webinar.

In my effort to decarbonize our home and convert all appliances from gas to electric, I was lucky our 15-year old natural gas water heater was approaching the end of its 15-20 year life. Most homeowners like me don’t think about replacing our water heaters until a mini crisis arises, when the unit rusts-out and starts leaking or simply stops working. That “emergency” type of timing makes it hard to research a thoughtful upgrade. Therefore, if your water heater is already more than 10 years old, consider proactively replacing it with an energy-efficient, all-electric version.

For better or worse, I had few options in choosing the best electric replacement for our Bradford-White 75-gallon gas water heater: I could go with the common electric resistance storage tank version, or with the newer heat pump electric systems. I looked into instantaneous, electric demand water heaters but quickly learned those were not practical for my whole-home purposes and better for sinks in a remote part of a new-construction home.

I replaced my gas water heater (left) with a Sanden high efficiency electric heat-pump unit (right) which uses free heat from outdoor air to warm water to 160F for storage in an indoor 83-gallon stainless-steel tank (center).

While the electric resistance heaters are cheap upfront ($500-1,500 installed cost), they consume much more electricity than heat pump models ($4,000-10,000 installed) which are 2-4x more energy efficient (thereby saving money over time).

Since I plan to live in my house for at least 10 years, I wanted to consider the total cost of ownership over time, not just the upfront cost. That led me to choose the heat-pump approach.

To understand those economics, watch this short educational video explaining why paying more upfront for a unit which uses less energy each month is the smartest economic choice. Note the financial summary (screengrab below) which shows the “Electric” resistance model costing the least after 1 year, but the “Hybrid” heat pump being the lowest-cost of ownership after accounting for energy savings by year 5 and 10.

Matt Risinger explains why heat pumps are more cost effective over time.

As a reminder in case you haven’t read my previous post on “what is a heat pump and how does it work to heat water and warm our homes,” what makes air-source heat pumps so energy efficient is that they move heat from one place to another, they don’t create it. My natural gas water heater installed in 2004 was 58% energy efficient, whereas my new Sanden heat pump water heater is 6x better with over 300% efficiency. The heat pump gathers free ‘heat’ from either inside or outside our homes, and concentrates and moves that heat energy to be stored in our 83-gallon water tank for us to take showers, wash our hands, do our laundry, etc. In summary, heat pumps win on efficiency because they have the easier job of moving heat instead of the harder job of creating it.

My installer offered me two options:

A. Rheem Prestige Hybrid Electric (PROPH65 T2 RH350 DCB). ~$5,000 installed cost

Pros: This 65-gallon, all-in-one unit has the heat pump built onto the top of the storage tank and would fit in the same mechanical room as my old unit, just taller. ENERGY STAR rated (so it qualifies for Federal $300 Tax Credit), it has a high Uniform Energy Factor of 3.7 (The UEF is a way of comparing the efficiency of water heaters. Heat pump models have the highest 1.9-3.7 range, while resistance electric are in the ~0.92 range and gas ~0.65). The Rheem can connect to Wifi and your mobile app for easy control and programming. Installed price including sales tax and labor = ~$5,000 (Note 2019 prices! These have gone up to $6,000 by now...)
Cons: Uses a refrigerant (R134a) with very high Global Warming Potential (1430x more damaging than CO2). I’ll talk more about the environmental friendliness of refrigerants later.

B. Sanden SANCO2. $9,000 installed cost

This is a “2-piece system” which separates a stainless-steel storage tank from an outdoor heat pump unit which heats up the water. The storage tank can be sited outdoors, or in a garage, or in my case in a downstairs mechanical equipment room. The maximum distance between the two is 50 feet. Sanden from Japan manufactured my unit in 2019, however stopped selling in the US a few years later. However a similar product can still be purchased and serviced by the former Sanden USA team, now operating as ECO2Systems.

Pros: The 83-gallon tank is made of stainless steel, which unlike typical products will resist interior corrosion and have an extra-long lifetime. Not that I did this with my natural gas unit, but there is no annual tank flushing required to get rid of sediment, and no anode rod replacement every five years to extend tank life. Does not require periodic air filter cleaning required by Rheem and others. Very hot water temperatures up to 175F (compared to 140F). ENERGY STAR rated with UEF 3.34. Best of all to me, Sanden uses a natural refrigerant, carbon dioxide, which is 1430x less damaging as a greenhouse gas than the hydrofluorocarbon refrigerant R134a.
Cons: The main drawback is the high price ($9,000 installed). A smaller issue is the inconvenient access to the temperature controller located in the outside unit, which is useful for programming to save energy during vacations and to avoid charging during expensive Time Of Use electricity hours.

Issues to consider before buying:

1. Noise. Because heat-pump water heaters use fans for air movement, they are going to make more noise than their gas counterparts, which are silent. The models mentioned above range from “whisper” quiet (Sanden 37dB, which to me is fairly unnoticeable) and “refrigerator” quiet (Rheem 49dB), to some other models which reach 55dB. We picked the Sanden model and had the fan unit installed outside a bedroom window. Fortunately, the noise is less than the street noise and thus unnoticeable. Also the heat pump usually runs only a few hours of a day when it’s heating up the water, otherwise it’s silent. We have programmed ours to run in the middle of the night when electricity prices are lowest and when we are asleep and can’t hear the sound anyways.

2. Cooling of the surrounding air. Heat pumps magically “rob heat” from the ambient air wherever they are placed and concentrate that energy to heat up your water. If located inside your home, the heat pump is perfectly situated for summer-time in Northern California, when I would want my home cooled down by this essentially free air conditioner (and dehumidifier). However, in winter I’d be paying a little more to heat my home since some of that warm air is being diverted into my heat pump to heat water. For this reason, heat pump water heaters are often sited in a garage or basement. If they are in a utility closet, they can be ducted to vent either to the outside or inside. I’ve even heard of duct-systems with dampers that can use indoor air in the summers (to provide the free air conditioning effect) and switched to use outdoor air in the winter. In my case, we picked the Sanden model which had the heat pump unit outdoors.

3. Environmental friendliness. One of the most authoritatively researched books I’ve read on reversing climate change is the NYT best-seller, Drawdown. In 2017, the book ranked the 100 most substantive solutions to reverse global warming, and #1 on the list (ahead of solar energy and electric vehicles) is “Refrigerant Management,” namely the phasing out of the super-potent hydrofluorocarbon (HFC) greenhouse gas chemicals which we use in our refrigerators, air conditioners and heat pumps and which have 1,000-9,000 times greater capacity to warm the atmosphere than CO2. In 2016, 170 countries voted to amend the Montreal Protocol to phase out HFCs, starting with high-income countries like the U.S. in 2019. The main reason I picked the Sanden CO2 unit was because it is leading the way away from HFCs by using carbon dioxide as the refrigerant (Global Warming Potential = 1), whereas all other units still use the hydrofluorocarbon R134a (GWP =1,430). I wanted to support companies that were innovating for our planet.

Note that air conditioners, refrigerators and heat pumps contain but do not consume HFCs. The HFCs are supposed to stay in a closed loop for the life of the product, and then to be “disposed of properly” through an EPA mandated process where they are carefully removed and destroyed (a process not frequently followed). These appliances may have just a cup-full of these chemicals, but that little bit can leak over time (which is why A/Cs in our homes and autos need to be “recharged” with more HFCs when they “aren’t cooling as well”). Manufacturers will be moving to low GWP refrigerants in the upcoming years. I would have been OK installing the Rheem and its R134a, just being sensitive to ensure proper disposal of the unit at its end of life.

4. Incentives. Although I got a measly $300 in incentives for my 2019 install, the great news is that starting in 2020 some juicy ones have become available that could pay for 40% or even 100% of your install! California policymakers at the state, regional and local levels are making a strong push to encourage homeowners to switch from natural gas to all electric appliances, with incentives for heat pump water heaters now ranging from $300-$5,000 depending upon where you live, the age of your home, your income bracket, etc. The list keeps growing, but here’s a sample of what I’ve discovered so far in Northern California:

The Inflation Reduction Act of 2022 is amazing and effective 1/1/23 for 10 years offers a 30% tax credit off the installed cost of a heat pump water heater (capped at $2,000 per year), and starting in late 2023 and 2024, offers an additional Point of Sale rebate up to $1,750 for homeowners earning 150% or less of the Area Median Income. Check this handy IRA calculator for more details.
- Dec. 2022: IRS issued new guidelines for heat pump water heaters, which falls under the Energy Efficient Home Improvements tax credit under Section 25C of the Internal Revenue Code.
- Q&A on Tax Credits under Section 25C. If you're wondering what to include in the cost basis when you apply the 30% Tax credit, this IRS guidance document is quite useful, especially Question and Answer Q-11.
"Switch is On" California: Type in your California zip code to see a full list of all rebates shown below, tailored to your location.
BayRen Home ($1,000). Available to residents of nine SF Bay Area Counties. For homes built in 2016 or earlier. Must replace existing gas or electric unit. Must use BayRen approved contractor. Program Overview (1/2022)
BayRen Home+ Contractor Incentive (additional $1,000). For BayRen Home+ applicants, this is an additional $1,000 available to MCE, EBCE and CleanPowerSF customers in Marin, Alameda, Contra Costa, San Francisco and Solano Counties. This program launched summer 2020 and is expanding around the Bay Area to other Community Choice Energy programs so be sure to ask about it. The $1,000 is paid to your contractor, who may pass all (or a portion) along to you the customer.
Electrify Marin ($1,000-$2,000 depending upon income, plus $500-$1,200 for a service panel upgrade if needed). Available to residents of Marin County only.
Peninsula Clean Energy ($3,000 plus funds for service panel upgrades and CARE customers). This is a great deal for San Mateo County area residents...tell your friends!
Sonoma Clean Power ($700-1000, depending upon income)
Silicon Valley Clean Energy ($1000-5000, depending upon income)
City of Alameda (Alameda Municipal Power) $1,500
PG&E 2022 Residential Rebate Program. $300 but only if you’re going from electric resistance to heat pump electric. 40-55 gallon units only.
IRS Residential Energy Credit (Form 5695, Part II, Nonbusiness Energy Property Credit, Line 22a). $300. I was eligible for this. See details and note December 31, 2021 expiration date.
List of other SF Bay Area programs here (January 2023)

In summary, you could be eligible for overlapping incentives (e.g. Marin County residents living in homes built before 2001 can now likely get incentives of at least $4,100 towards this ~$6,000 upgrade.) Discuss with your installer, but it's so dynamic they may not know everything that's available so get a few bids and do your own research too.

Summary: Writing this in November 2020 after 18 months of use, the Sanden heat pump water heater has been a solid performer, delivering plenty of very hot water for a family of four while our overall energy costs during that time have declined slightly. To save money, we programmed the unit to run only when electricity rates are low (e.g. at nighttime). The only downside we’ve seen so far of this high-performance unit is that it lacks WiFi and the ability to be controlled by a smart-phone. In fact, setting the temperature and programming the Time Of Use requires opening the outside unit with a screwdriver to access the control pad. This drawback keeps this unit off some rebate program lists.

Choosing a heat pump electric hot water heater is a smart choice because natural gas water heaters are the second most carbon polluting appliance in a typical California home.

And after I cut off all my gas appliances in my home, my gas bill went to zero, and while my electricity bill rose, my overall annual energy costs are now less than before!

Kwok PG&E energy costs before and after going all-electric in Summer 2019