There is a Federal Energy Efficiency Tax Credit on Qualifying Gas, Oil, Propane Water Heaters as well as Electric Heat Pump Water Heater and Solar Water Heaters. If your water heater is on its last legs, you might as well upgrade now and save some money. Newer water heaters require less energy and time to heat water. Reduce the waiting time between showers and doing laundry.

For 2011, the Federal Tax Credit for energy efficiency drops to 10%, up to a $500 maximum. (2010 Federal Tax Credit information)

• $300 cap for water heater
• Gas, Oil, Propane Water Heaters must have Energy Factor >= 0.82 or a thermal efficiency of at least 90%
• Newer Hybrid water heaters are also available
• Electric Heat Pump Water Heater requirements are the same as ENERGY STAR: Energy Factor >= 2.0.

• Existing home and principal residence.   New construction and rentals do not qualify.
• Expires December 31, 2011 – Consult the What other rebates are available? below for other possible rebates.

The 2011 tax credit reverted to  2005-2008 levels. Anyone who previously took advantage of the program can’t apply for incentives that exceed $500.  IE If you claimed $500 between 2005 – 2008 on a previous energy efficiency project, or at least $500 tax credit from 2009 – 2010, you are ineligible for the 2011 energy efficiency tax credit.

If you used say $200 of the $500 energy efficiency tax credit from 2005 – 2008, and did not utilize the 2009 – 2010 energy efficiency tax credit, you would still have a $300 credit available.

Federal Energy Efficiency Tax Credit on Qualifying biomass fuel stoves or Wood Heat Stoves, Pellet Stoves, Fireplace Inserts.  There is also a Federal Tax Credit for Energy Efficiency on Water Heaters, Wood Heat Stoves, Pellet Stoves, Furnaces and Boilers, Geo-Thermal Heat Pumps, Windows, Doors, and Skylights.

Consider an on demand Tankless Water Heater if your situation allows for it.  Most need ready access to a good sized gas pipe and exhaust vent.

Solar Water Heaters are covered if they are EnergyStar certified. The Federal Tax Credit for solar water heaters is 30% of the cost including installation and labor. It expires December 31, 2016.

AO Smith makes the hi tech Vertex 100 water heater that is very efficient, but requires PVC pipe venting not normal metal venting. Also consider installing radiant floor heating instead of using a gas furnace as these newer water heaters support radiant heating.

This credit reduces the amount of tax you owe. The credit is a reduction of total income tax at the bottom of your return. This tax credit is a non-refundable tax credit. Consult your tax adviser for details. Use it or lose it!

Double dip! Local utilities like PG&E have their own rebates for Energy Efficient Appliances.

Note: It is difficult to find larger sized water heaters with Energy Factor’s not qualify.

Be sure to check out our reduce water heater use, water saving tips and ways to save energy.

We recently covered Tankless Water Heaters. A new product is the Hybrid Water Heater. Like ones from Eternal and GE.  Hybrids have 2 modes of operation. With low flows it has a fixed gas input rate from the preheated water, with higher water needs, it uses a flow sensor like a tankless water heater. GE claims their electric, Energy Star Qualified Geospring Water Heater uses up to 62% less energy than a conventional water heater, and saves $300 a year in energy costs. It has a high energy factor of 2.35. Consumerreports.org has a mini review, their October 2010 print issue has a bigger review.

Hybrid Water Heaters are much higher in efficiency than a regular water heaters, but holds less hot water, usually less than 50 gallons.  Recall that Tankless water heaters may not have the capacity to satisfy multiple water uses at the same time and have issues when temperatures are cold. Energy Star standards are emerging for these new items. These units can be up to 50% more efficient.

Downsides:

1. They are taller, up to 7 feet tall
2. Hybrid water heaters need space to capture uncooled air, upto 1000 sq ft
3. If you do no have a nearby drain, a condensate pump ($150) is needed
4. They are noisier than conventional water heaters

These items are not cheap, they start around $1600 – $2000 for a 50 gallon, 15GPM GE GeoSpring Hybrid Water Heater model. It is projected to have a 56% annual savings, resulting in a short 4.5 year payback time with Federal Tax Credit.  10 year warranty.

The 50 gallon Rheem HP50RH hybrid water heater is slightly cheaper at $1600 – $1750, 58% annual savings, 4 year payback, 10 year warranty.

Most Hybrid Water heaters are covered by the 2010 Federal Energy Tax Credit, so you can save additional money by purchasing it.