Now May be the Ideal Time to Convert to Heat Pump Water Heaters in Your Homes and Owner-Occupied Rentals

By Eric Weld, MassLandlords, Inc.

With federal water heater efficiency standards scheduled to increase in a few years and the impending uncertainty of tax incentives in the Inflation Reduction Act (IRA), now might be the most optimal window for replacing your gas-, oil-powered or electric resistance water heater with an electric heat pump model.

Heating water for household use, for bathing, washing clothes and dishes, and other uses, accounts for about 18% of energy use, the second-highest household energy use. Electric heat pump water heaters can trim hundreds off a home’s annual energy costs. Cc by-sa Wikimedia commons

Before the U.S. Senate is the “One Big Beautiful Bill Act,” a comprehensive set of laws that includes evisceration of the tax credits for energy efficiency measures codified in section 25C of the federal tax code. Included in the 25C credits is the 30% tax incentive for replacing water heaters with highly efficient heat pump models in homes and owner-occupied rentals. If the bill is approved by the Senate, tax credits for heat pump water heaters, as well as a long list of other energy efficiency incentives, could be gone by December 2025. (IRA credits do not apply to properties that are strict rentals, i.e., those that are not owner-occupied.)

The combination of Mass Save rebates and IRA tax credits substantially whittles down the cost of conversions to heat pump water heaters (HPHWs).

Mass Save, the state’s energy efficiency program, offers rebates for heat pump water heaters of $750 per unit for models that meet energy efficiency eligibility. The IRA offers tax credits of 30% to incentivize purchases of Energy Star-certified HPWHs, up to $2,000.

Together, these incentives could nearly cut your replacement bill in half. According to Mass Save estimates, a water heater replacement to a heat pump model costs an average of $3,200. With a $750 Mass Save rebate plus a 30% tax credit (equaling $735 at this sample price point, applied after the Mass Save rebate), the final bill would total $1,715.

Factor in annual savings of $600 (Energy Star estimate for water heating savings for a family of four) and a drop-in replacement heat pump water heater could pay for itself in only three years. Over the lifetime of the product, savings could add up to more than $4,500, according to Energy Star.

IRA Tax Credits for Energy Efficiency?

Mass Save rebates aren’t expected to go away any time soon. Contrary to some reports, Mass Save has been enormously successful in lowering energy bills for Massachusetts consumers. Since the statewide energy efficiency program launched in 2013, it has provided $31 billion in benefits for Massachusetts customers through free and discounted home insulation installations, floor sealing, new appliances, and home energy conversions, such as heat pumps for air conditioning and water heating. The total cost of this program has been $8 billion. That’s a net savings of more than $3 for every $1 invested in Mass Save.

IRA tax breaks are less certain. The somewhat misnamed IRA is a comprehensive bill signed into law by President Joe Biden on Aug. 6, 2022. The bill was devised partly for the purpose of reducing costs and saving U.S. consumers money as a way to manage high inflation at the time. It includes a range of climate change measures, including tax incentives for electric conversions like heat pump water heaters, aimed at maximizing energy efficiency to minimize long-term expenses.

On the fall 2024 campaign trail, then presidential candidate Donald Trump pledged to rescind any unspent funds from the IRA. His administration’s bill now making its way through Congress would partly deliver on that pledge. Even if the Senate blocks or alters the bill, the president may be able to change regulations on tax credits, limit eligibility or delay or withhold funding for clean energy programs. The administration has already attempted to roll back dozens of climate policies, reducing restrictions on air, water pollution and chemical runoff, as well as deregulating environmental restrictions on fossil fuel production.

Time may not be on the side of those of us counting on a big chunk of savings through tax breaks for converting to heat pumps. But investing in a heat pump water heater now, before the effective date of any repeal, will still be fully creditable on your owner-occupy taxes.

HPHWs for Higher Efficiency Standards

Meanwhile, maybe contradictorily, raised energy efficiency standards for residential water heaters are still on track to go into effect nationally in 2029, as of time of writing. Once these new standards kick in, most purchases of household water heaters will have to meet higher efficiencies using heat pump technology.

The Department of Energy, which announced the raised standards in April 2024, predicts the shift will result in a 50% boost in heat pump water heaters, saving property owners some $7.6 billion in annual energy and water bills while reducing carbon emissions and loads on energy grids.

The raised standards will apply to gas- and oil-powered and electric storage water heaters manufactured as of 2029. (Similar standards for instantaneous gas and electric resistance water heaters have been rescinded; this is expected to be challenged in court.) For many water heater types and uses, compliance with the new standards will only be achievable by converting to heat pump models. Raised efficiency standards for commercial water heaters will take effect in October 2026.

Read more details about the raised efficiency standards.

More Than Cost Savings

The economics of electric conversion are a top consideration for property owners paying the bills. But moving away from fossil fuel appliances is also about the long-term (and, increasingly, immediate) health of the planet and its inhabitants.

The primary cost of a gas water heater is externalized. In other words, it lands not on the owner of the gas water heater but on all of us in terms of a little increased flood, fire, wind and other risks due to climate change. Multiply this by all the gas appliances in the world, and the risk grows way beyond little.

It’s essential that property owners convert to non-fossil fuel-burning water heaters in order to reduce our collective carbon emissions and lessen impacts of climate change. If Massachusetts is to achieve a 50% reduction in carbon pollution by 2030, as mandated in the climate plan, the pace of switching to electric water heating will have to pick up among property owners, especially multifamily owners. After 2030, the pressure to hasten that conversion pace will continue to increase in order to achieve the law’s goals of 75% carbon reduction by 2040, and net zero carbon emissions statewide by 2050.

Heating water, for cooking, bathing, washing dishes and clothing and a few other uses, is the second-leading consumer of household energy in Massachusetts and nationally, at about 18%. (Space heating and cooling is the leading household energy user nationally, taking up some 45% of home energy expense.) As of 2020, more than 45% of Massachusetts households used water heaters powered by either natural gas or oil, according to a residential baseline study conducted by Guidehouse, a national consulting firm for energy, technology and other sectors. That’s more than 1.4 million households that need to convert to electric.

Perhaps due to their second-tier status as household energy users, water heaters have received scant attention in comparison with the heavy emphasis on converting HVAC to heat pumps. And true, converting to electric space conditioning is paramount to reach our carbon reduction goals. But even if every property owner converted to electric heating/cooling, if we don’t achieve similar conversions to electric water heating, we will fall far short of our carbon reduction goals.

It might even make sense for some property owners to consider beginning with water heater replacement, given the financial incentives in place through Mass Save and the lower cost of water heaters compared to heating/cooling systems. Another consideration: heat pump water heaters are available for installation, while heat pumps and components for air conditioning, very popular items right now, may require a wait of several months.

Making Slow Progress on Heat Pump Water Heaters

After many years of scant growth in water heating conversions, it seems we are finally making progress nationally, though there’s still a long way to go.

According to Energy Star data, calendar year 2023 saw a leap in heat pump water heater sales, with 190,000 units shipped nationwide, representing a 35% increase over 2022, and 4% of the water heater market. Importantly, HPWH market share surpassed the 3% market share of gas storage water heaters in 2023, as well as sales of gas storage units (143,000). Gas tankless water heaters, however, posted strong sales of 528,000.

Tankless gas water heaters, especially the brand Navion, are a developer favorite for their reliability and small footprint.

Massachusetts is expected to see a boost in water heater conversions in 2025 and thereafter, as a Mass Save program takes effect that provides electric energy conversions, including water heaters, for homes and rentals in 21 Designated Equity Communities (DECs). (The funding for heat pump water heaters may be reduced in the wake of a $500 million cut to the Mass Save budget by the Department of Public Utilities in 2025, in response to widespread customer complaints about high winter energy bills).

The Mass Save DEC program is essential for helping housing providers convert to electric by addressing the “split incentive” issue, which deters some landlords from investing in electric conversion when only their tenants will benefit from resultant lower utility bills.

The Advanced Water Heating Initiative, a national program based in Portland, Ore., has been instrumental in working with the federal government to raise efficiency standards, a long-needed change. MassLandlords has a stakeholder membership in AWHI and participates in the equity working group.

If you notice liquid running or leaking from your water heater, like this one, it’s probably time to replace it with a heat pump water heater. Cc by-sa flickr Rob Ireton

When Is It Time to Replace Your Water Heater?

Federal tax incentives and Mass Save rebates notwithstanding, if water heaters in your property show signs of aging, or are more than 10 years old, it’s advised to convert to heat pump models now.

Not only will you be in compliance with raised efficiency standards when they take place, but you might also save a lot of money in emergency repair costs or damages to a water heater’s surrounding area.

Another advantage of heat pump water heaters is their life span. Conventional, fossil fuel-powered water heaters’ on-paper life span is 8-12 years, depending on several factors, while HPWHs are expected to last 10-15 years on average. (To achieve this longer life, you must select a heat pump water heater with a powered (lifetime) anode rod, or else replace the anode rod every couple of years. You must also clean the air filter as needed to optimize duration.)

For optimal operation, your new heat pump water heater should be placed in a somewhat open area to allow air circulation. An unfinished basement is ideal, but a laundry room or utility room can also work well. Tight, enclosed closet spaces with close walls are not advised, but a closet with louvered vents can work.

When siting a heat pump water heater, it is important that the outlet air is not blowing against a wall. The outlet air is cold. It will cool the wall. It may drop the wall temperature below the dewpoint, and this dewpoint may be different in the unventilated wall cavity than in the closet where the water heater has been installed. In other words, you may trigger condensation in the wall that you cannot see until mold has filed the cavity and is growing out of the wall seams.

If possible, think about placing your heat pump water heater next to your clothes washer or dryer. The heat pumps utilize waste heat from surrounding appliances, absorbing warmth from the air and circulating it via refrigerant to heat water inside the unit. It also absorbs moisture when it’s in operation, acting as a dehumidifier, provided the outlet vent breathes.

When is it time to consider a water heater replacement? Before any of the following:

• You notice water from your faucets is taking longer to warm up or not heating up at all.
• You see corrosion around water lines or anywhere on the unit.
• You notice water leaking around joints, seals or seams.
• You detect signs of rust in your water.
• You hear vibrating or rumbling noises from your heater.

Any of the above telltale signs are flashing warnings that it’s time to convert to a heat pump water heater. But if you want to maximize financial incentives and reduce upfront expense, the time to convert might be now. Starting now would give you time to have a new electrical circuit run, if necessary, and to schedule the replacement on a routine, non-emergency basis.

Frequently Asked Questions

Does the IRA credit apply to non-owner occupy?

No, the Inflation Reduction Act credit for heat pump water heaters applies only to the first or second residence of the taxpayer. LLCs, Incs and non-owner occupied properties cannot claim the heat pump water heater IRA credit. However, the Mass Save rebate still applies.

Aren’t Heat Pump Water Heaters too weak for rental use?

Not at all. Generally, any model you can buy in Massachusetts will specify a 20-amp or 30-amp circuit. This allows you to use a built-in electric resistance element as a backup “boost.” For example, a Rheem Proterra heat pump water heater set to “Energy Efficiency” mode will use the heat pump as much as possible. When rapid drawdown is detected, for instance, toward the end of the morning or evening shower time, the electric resistance heater comes on only as necessary to ensure a continuous supply of hot water. Once draw-down stops, the heat pump takes over again. The short-term use of electric resistance boost lowers the efficiency compared to using the heat pump only, but ensures renters never experience loss of hot water.

Aren’t Heat Pump Water Heaters too expensive?

We built a heat pump water heater vs. gas vs. electric spreadsheet. The answer is “sometimes yes, sometimes no.” A heat pump water heater installed cost might be $4,300. Subtract a $750 instant rebate from Home Depot, Lowes or via your Mass Save contractor. Subtract a further 30% of the balance due to the Inflation Reduction Act tax credit, $1,065 for owner-occupy, if applicable. This brings the installed cost to $2,485. Relative to an installed cost of around $1,200 for either gas or electric resistance, yes, heat pump waters are expensive. But that’s not the whole picture.

Rental owners installing new gas appliances are now frequently targeted by inspectional services for needing makeup air. Makeup air may be required when gas appliances draw air out of the interior space, creating negative pressure and potential back drafting in the appliance. This can result in unhealthy inside air and inefficient appliance performance. Makeup air might cost $1,500 installed, depending on whether it’s heated or unheated and how complex the space is.

The math for a heat pump water heater pencils out when you account for operational expenses and the rent increase you can justify. Heat pump water heaters are cheaper to operate than gas by approximately $2 per month over the life of the heater. That’s nothing. So, you can consider heat pump water heaters on par with gas. Heat pump water heaters are cheaper by $110 per month relative to electric resistance. That’s more money your renters have to pay.

A heat pump water heater has no climate policy risk. Gas is being phased out by 2050, and electric resistance by 2029.

Is it okay to install a gas water heater?

Yes, gas is reliable and soot-free. But no, gas is not “clean” or zero emissions. Installing a gas water heater can make sense economically and it’s okay to install one if that’s your best option. But bear in mind that gas represents 100-year-old technology that puts costs on the rest of us in the form of emissions. So try to replace gas where economically possible.

What if I don’t have a 20-amp circuit?

You have a few options.

First, in a well-insulated space, you might be successful with a heat pump only model that connects to a standard 110 V outlet and draws 1 amp. These are being trialed in California and theoretically would work well if the heat pump water heater is in a conditioned space rather than a basement.

Second, smart panels like the Span will allow you to install appliances over the maximum allowable amperage by using hardware disconnects to throttle unnecessary appliances during peak load times, which are actually rare for most households (12 to 20 times per year, according to Span talking to the Volts podcast.

Third, if you have the panel space but not the circuit, going rates for a new circuit are approximately $1,000 to $2,000.

This heat pump water heater replaced a failing gas heater in the basement of a Worcester, Massachusetts "triple decker" (three residential units stacked). Replacing the gas water heater with a heat pump saved the owner more than the cost of gas. The chimney was overloaded: it had three gas boilers and three gas water heaters piped into it. Also, the basement was under-ventilated: the city might have required "make-up air" be piped in from outside to ensure clean combustion. This heat pump water heater reduced the chimney load, eliminated the need to install make-up air, and provided all the usual savings of heat pump water heaters. And yes, there's still headroom to remove and clean the filter. Licensed CC BY-SA 4.0 MassLandlords, Inc.

Don’t Heat Pump Water Heaters freeze the surrounding space?

A Rheem Proterra installed in a Worcester three-decker basement took the interior temperature down approximately 5 degrees Fahrenheit in the winter, from 50 F to 45 F. Many models have temperature controls that switch to electric resistance when the air temperature drops too low; this is less about preventing freezing and more about giving up on efficiency. The warmer the surroundings, the more energy the heat pump can extract.