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The U.S. Department of Energy (DOE) recently proposed new energy efficiency standards for residential water heaters. The proposed standards would require most standard-sized electric water heaters to use heat pump technology in order to achieve efficiency gains, while gas-fired instantaneous water heaters would need to use condensing technology to meet efficiency requirements.

The proposed new standards have drawn hundreds of comments so far, and not surprisingly, there is a wide array of opinions as to whether they will help or hurt consumers. Some praise the new standards, saying they are necessary to reduce energy use and greenhouse gas emissions, while others express concerns about how they will restrict choices and increase prices for homeowners.

According to DOE, water heating is responsible for roughly 13% of both annual residential energy use and consumer utility costs, and water heater efficiency standards have not been updated since 2010. If adopted within DOE’s proposed timeframe, the new rule would apply to new water heater models starting in 2029.

Changing Standards

The proposed standards will have a profound impact on the marketplace as a whole, with the most significant changes relating to electric storage, gas instantaneous, and gas storage water heaters, said Randy Oshiro, manager of engineering at Noritz America.

LEARNING CURVE: Contractors will have a learning curve, as much of the new equipment will have more sophisticated controls and mechanisms to meet the efficiency requirements. (Courtesy of Noritz America)

“For electric storage, the proposed rulemaking will eliminate the use of resistance electric water heaters for the vast majority of homes, with heat pump technology being the minimum requirement,” he said. “For gas instantaneous water heaters, the proposed rulemaking will eliminate noncondensing product from the marketplace, with only condensing water heating technology permitted to be manufactured and sold.”

For gas storage-type water heaters, there is a nominal increase in the minimum of about 0.05 UEF (uniform energy factor), with slight variations depending on the size of the tank, added Oshiro. Noncondensing gas storage water heaters would still be available under the proposed rule.

Under the proposed standards, minimum efficiency levels for residential water heaters will increase dramatically, said Josh Greene, vice president of government, regulatory, and industry affairs at A. O. Smith. Gas tankless water heaters would have a national condensing standard of 0.93 UEF, and as noted above, noncondensing gas tankless models would be phased out.

“For gas storage, the minimum UEF will rise to 0.68 and eliminate standard atmospheric products and transition to non-powered or powered damper products,” said Greene. “The current National Appliance Energy Conservation Act (NAECA) 3 standard requires electric storage water heaters above 55 gallons to be heat pump water heaters. The new proposal would lower that threshold to 35 gallons. It’s an effort to move the market away from the ubiquitous standard electric resistance water heater toward heat pump technology.”

Greene added that the biggest challenge in the proposed final rule is the phaseout of standard electric water heaters in the 35- to 50-gallon range. “Under the DOE’s proposal, millions of electric storage water heaters installed today will eventually need to be replaced with heat pump water heaters. This includes standard electric products, as well as certain sized low-boy electric storage water heaters,” he said.

HIGH EFFIENCY: Heat pump water heaters can offer higher efficiency than traditional electric resistance water heaters. (Courtesy of Rheem)

While water heater models that cannot comply with the new standard will be phased out and replaced with higher efficiency models, Rheem expects continued availability of water heaters for all applications and uses, including water heaters designed for space-constrained installations, said Karen Meyers, vice president of government affairs at Rheem Mfg. Co. She added that consumers will be able to replace their water heater in a near like-for-like manner for all water heater types.

“The efficiency of heat pump technology is well above that of traditional electric resistance water heaters,” she said. “As proposed, electric storage (tank) water heaters will be required to have greater than 2x the efficiency of the current standard. Small water heaters with a volume ≤35 gallons, which are typically found in multifamily apartments or smaller homes, can meet new levels without using heat pump technology.”

For gas-fired storage (tank) water heaters, the new efficiency levels can be met using existing noncondensing technology, ensuring the availability of gas-fired storage water heaters for a broad range of applications, added Meyers. And even though gas-fired tankless water heaters will require condensing technology, the incremental improvement in efficiency should come without a significant cost increase when the total cost is accounted for, she said.

Industry Impacts

That said, when DOE increases the federal minimum efficiency of an appliance, there are typically higher upfront costs, said Meyers.

“These costs are usually offset by lower utility bills,” she said. “In the case of this consumer water heater proposed rule, the payback periods range from three to eight years. Rheem anticipates manufacturing a wide selection of heat pump water heaters, at varying cost points and efficiency levels to meet consumer needs. The DOE’s proposal will also allow manufacturers to offer heat pump models with varying features to meet a broader set of consumer needs.”

On the whole, though, new equipment will likely be more expensive, as higher complexity generally incurs higher costs, said Oshiro, and the rulemaking will, on a broad level, cause quite a bit of pain for consumers, contractors, and manufacturers. In addition, some of the new types of systems operate differently than traditional water heaters, and consumer unfamiliarity may lead to more complaints or concerns from customers.

“But the primary downside for consumers will be the obsolescence of existing equipment,” said Oshiro. “Newer, advanced-technology products come with changes to installation practices. These changes will often necessitate significant infrastructure changes to the home in the case of replacement.”

This leads to concerns about customers being able to successfully replace existing equipment with newer systems. In some cases, this will simply be a cost consideration; for example, customers deciding to change from a gas water heater to an electric heat pump may require an upgraded electrical panel, said Oshiro.

“However, there are also homes with physical constraints, such as the size or location of an existing water heater,” he said. “That reality may make replacement with a similarly performing, but different type of water heater difficult. In addition, the physical size of similarly performing equipment will be changing slightly, likely getting larger, as tanks add components or insulation to meet the required efficiency levels.”

As an example, Oshiro cites switching from a noncondensing to a condensing-type water heater, which will require changes to the vent and the need for drainage of the condensate formed during water heater operation.

“As the majority of water heater replacements are done on an emergency basis, the time and cost of making major changes for installation will come at a higher cost, both in equipment and labor. These costs will be incurred when a like-for-like replacement is not available in the marketplace,” he said.

Greene agrees that many customers won’t be able to install a heat pump water heater for a variety of reasons, including size constraints and electric panel issues. And, as most water heater installations are emergency replacements, there may be limited availability of equipment.

“It was easy when a plumber could keep standard water heaters on the truck and install a unit in a closet,” said Greene. “But the logistics will be more complicated with the transition to more heat pump water heater installations. Contractors will have to work with their distributors to prepare for this shift.”

Contractors are also going to need specialized training on how to properly install heat pump water heaters. Meyers noted that since 2019, Rheem’s in-person, hands-on classes have trained more than 350,000 global plumbers, contractors, and key influencers on how to appropriately install sustainable products such as heat pump water heaters.

New heat pump courses have also been added to A. O. Smith University to ensure that contractors are receiving the most up-to-date training as possible, said Greene. But there are still the problems with the ongoing skilled labor shortage, as well as the aging of the contractor workforce.

“The average age of a master plumber in the U.S. today is 60 — and many run family businesses where the next generation may not be interested in learning the trade,” said Greene. “One solution is to recruit experienced HVAC professionals, because they’re comfortable with refrigerants, as well as being more accustomed to installing heat pumps and split systems where the compressor is outside. In a similar fashion, they can install the water heater tank indoors and the heat pump outdoors.”

As for manufacturers, Greene noted that those primarily in the tankless water heater business are going to have to shift their product development focus, as a lot of their current volume will go away.

Big Changes Ahead

The proposed final rule is, without a doubt, the biggest change the industry has faced in recent years, said Greene.

“There are an estimated 60 million standard electric water heaters currently installed in the U.S. today, all of which will need to be theoretically converted to heat pump water heaters over the next 20 years,” he said. “In 2022, the entire industry shipped approximately 130,000 heat pump water heaters nationwide, and while A. O. Smith had a sizable share of that annual volume, it represents 2% of the current water heater market. Hence, the net effect of the DOE’s proposal would require a dramatic increase in heat pump water heater manufacturing to ensure supply will meet market demand.”

Noritz, which specializes in the manufacture of instantaneous water heaters, would like to see the final rule allow customers to opt for a noncondensing product — especially for lower-income customers who cannot easily switch to a condensing-type water heater without incurring significant conversion costs during installation, said Oshiro.

“We understand and support the need to reduce carbon footprints, but this particular step feels somewhat unfairly implemented,” he said. “Under the proposed rule changes, less-efficient storage tank water heaters — which command a significantly larger share of the market — are allowed to maintain the option for noncondensing product, even while condensing storage tank options are available. Meanwhile, the instantaneous category, currently a distinct minority, loses the noncondensing option, although it is far more efficient than noncondensing storage units.”

DOE estimates issuance of a final rule in 2024. For the latest information about the proposed new water heater standard, click here.