Water heaters, the second-largest energy expense for American homeowners, typically account for about 18 percent of a home’s utility bills. To meet the expectations of energy- and cost-conscious home buyers, builders need to carefully research the types of water heaters to find which is right for their new homes. Look for units that are appropriate for the region, sized for efficient operation, and able to cut operating costs. Important considerations are available fuel types, the home’s peak-hour demand, and price.

Recent advances in water heating technologies merit a closer look at the relative strengths and weaknesses of each type. Storage tank water heaters have the lowest up-front cost, but they are subject to standby heat loss and may have the greatest operating costs. However, with some models able to deliver more than 100 gallons of hot water per hour, storage heaters continue to be a strong option for large families and budget-conscious homeowners. Energy Star reports that an Energy Star–rated storage tank water heater can save households $40 per year on energy costs compared with a non-Energy Star labeled unit.

Tankless water heaters eliminate standby heat loss and never run out of hot water, but they’re not appropriate for every situation. A unit’s flow rate (gallons of water per minute) constrains the number of fixtures that can simultaneously use hot water. These demand-type water heaters make the most sense in homes where the hot water fixtures are relatively close together, as a point-of-use solution in a large home, or in homes with low or irregular volume demands. Energy Star rated whole-home gas tankless models are estimated to save $100 per year.

Heat pump water heaters—the most efficient electric option—work like a refrigerator in reverse to transfer energy from the surrounding air to water in a storage tank. These cost more than a conventional heater, but homeowners can expect a payback period of four to five years with regular use. Energy Star reports these models save almost $300 a year compared with a standard electric heater. Heat pump units function in temperatures as low as 45 degrees and also can provide dehumidification if located in the basement.

In April 2015, the DOE will tighten water heater standards with incrementally higher Energy Factors (EF) in all residential storage, tankless, and electric water heaters. While models already carrying an Energy Star rating will not be affected, some insulated storage tank heaters will be up to 2 1/2 inches  wider to meet the new regulations, so be sure to measure twice before next April.

Smart hot water use starts in the design stage of the home, says building scientist Carl Seville of SK Collaborative. Builders should be mindful of the distance of hot water fixtures to the heater and shouldn't bundle hot and cold water pipes together. “More energy and water are wasted with bad piping than inefficient water heaters,” he says.

Trends in water heaters vary greatly by region. Tell us where you are building and what system you are using in the comments.