Water heating is the second-largest energy-consuming item in the home after space heating, accounting for 20 percent of the total.

Until now, water heaters ran and ran, wasting money and energy. And though the market has seen the rise of innovations that improve the efficiency of gas units, the electric category has not been so lucky.

Enter the electric heat pump water heater. “It looks like a standard tank and it is,” says Jeff Haney, a product manager for water heating at Atlanta-based Rheem Manufacturing Co. “But the hybrid portion on top takes heat from the surrounding air and heats the water.”

A hybrid is the only electric unit that is Energy Star rated. It’s three times as efficient as a standard tank, says David Chisolm, brand manager at A. O. Smith, in Ashland City, Tenn., which means a significant reduction in energy costs.

This type of innovation does not come cheap, however: A hybrid unit will cost significantly more than a traditional tank. But the upfront cost is only half the story. “A standard electric tank will cost about $1,000 installed, but it costs about $550 per year to operate,” he says. “A heat pump model runs about $1,500 to $1,800 and sometimes over $2,000, but it costs only $203 per year.”

The payback time for a unit is typically about three years, Chisolm declares, but the cost and the time it takes for homeowners to recoup their money come down once you start to factor in state rebates and the federal government’s tax credit. “It also depends on where you live,” he adds. “What is the utility cost in your area? If it’s high, then the payback time is even faster, sometimes only one and a half to two years.”

You also save money over the life of the product, says the American Council for an Energy-Efficient Economy in Washington. According to the group, a standard tank and a heat pump unit last about 13 years, but the total cost for the conventional unit during that time is roughly $6,769, while the hybrid costs about $4,125 (depending on the product used).

For new construction, a hybrid electric unit is simple to install and easy to specify. Both home builder and home buyer must take into consideration some of the same factors as if they were using a traditional tank. “It’s an easy install and an easy change out,” says Haney. But there is more to know about this category.

“Heat pump water heaters should be installed in interior spaces that remain between 40° to 90° F year round and provide 1,000 cubic feet of air space around the water heater,” the EPA says. “They generally don’t operate as efficiently in colder spaces and can cool the spaces they are in. If possible, consider installing in a space with excess heat, such as a furnace room.”

The unit needs that amount of space because it pumps out cool air, and you need enough space to exchange that air, Haney explains. “They can fit in a lot of places,” he adds. “But they’re ideal in high-temp, high-humidity climates.” Still, there are areas of the home where they’re not recommended.

“We strongly discourage putting it in the attic,” says Chisolm. “Putting it in the attic could cause damage in the event of a water heater failure. If we can get away with [not doing] it, we discourage it.”

Manufacturers are bullish on this new category. Unlike tankless water heaters, which many home buyers don’t trust, hybrid tank units stand a better chance of being accepted into the mainstream, manufacturers believe, because they look familiar. “It’s really a niche category right now,” says Haney. “But as consumers become aware, you’ll see it expand.” 

Learn more about markets featured in this article: Atlanta, GA.