Hot water is one of the biggest slices of a household energy bill, so the system you pick affects what you pay every quarter for the next decade. The trap most people fall into is comparing sticker prices at the shop and stopping there. A cheaper unit that costs more to run can quietly cost you more over its life than a pricier one that sips energy.
This is the money side of the decision. If you still need help picking between a tank and a continuous flow gas unit, read our guide on choosing the right gas hot water system first, then come back here to run the numbers.
TL;DR
- Look at three numbers together: upfront price, yearly running cost, and expected lifespan. One number on its own tells you very little.
- Heat pumps and solar tend to have the lowest running costs but the highest upfront price. Electric storage is usually cheapest to buy and most expensive to run.
- Gas continuous flow sits in the middle on running costs, and the daily gas supply charge matters if hot water is your last gas appliance.
- Rebates and off-peak or solar electricity can change the maths significantly, so get local figures before deciding.
- Installation and replacement is licensed work. A plumber can size the system properly and confirm what your home can actually take.
The short answer on what’s cheapest to run
Across recent Australian modelling, the ranking on running cost is fairly consistent. Independent comparisons and installer estimates put heat pumps well ahead on ongoing cost, with electric storage the most expensive to run and gas somewhere between.
One 2026 comparison summed it up plainly: a heat pump is often cited around $200 to $300 a year to run, against roughly $750 to $1,000 for an electric storage tank and $400 to $700 for gas, depending on household size and tariff. Those are indicative figures, not a quote, but the pattern holds: the cheapest thing to buy is rarely the cheapest thing to own.
Why running cost beats upfront price
Think of a hot water system as two costs stacked on top of each other. There’s what you pay once to buy and install it, and there’s what you pay every year to run it. Over a 10 to 15 year life, the running cost usually dwarfs the purchase price.
A simple way to compare fairly: add the upfront cost to ten years of running cost, then divide by ten. That gives you a rough yearly cost of ownership. A $600 electric tank that costs $900 a year to run works out far dearer over a decade than a heat pump that costs more upfront but runs for a few hundred dollars a year.
How each system compares
Electric storage
Cheapest to buy, simplest to install, and it works anywhere there’s power. The catch is running cost. Heating water with a resistive element is energy hungry, especially on a standard peak tariff. If it’s on a controlled load or off-peak tariff the cost drops, but it’s still usually the most expensive of the four to run over time. Reasonable choice for a low-use household or a tight upfront budget, less so if you’ll keep the home for years.
Gas (storage or continuous flow)
Gas sits in the middle. Running costs are typically lower than electric storage and higher than a heat pump. Continuous flow only heats water when you draw it, which avoids standby losses. The thing many people forget is the daily gas supply charge on your bill. If hot water is the last gas appliance in the house, that fixed charge is effectively part of your hot water cost, and it can push gas closer to the pack than the per-litre heating cost suggests.
Heat pump
A heat pump works like a reverse-cycle air conditioner in reverse, pulling warmth from the surrounding air to heat water. Modern units deliver several units of heat for every unit of electricity, which is why running costs are so low. Upfront cost is high, but federal certificates and some state rebates bring the installed price down, and the numbers get even better if you can run it during the day on rooftop solar. Best fit for households planning to stay put and wanting the lowest bills.
Solar hot water
Solar thermal panels heat the water directly, with an electric or gas booster for cloudy days and winter. In sunny, warm parts of Australia the running cost can be very low. The upfront price is the highest of the group and performance depends heavily on roof orientation and local climate, so it makes most sense where sunshine is reliable and roof space is available.
A worked example of the trade-off
Say two households each replace a dead tank. One buys a basic electric storage unit to keep the upfront cost down. The other spends more on a heat pump after rebate. On day one the electric household is ahead on cash. But if the electric tank costs several hundred dollars a year more to run, the gap closes fast, often within a few years, and after that the heat pump household is saving money every quarter for the rest of the system’s life. That’s the whole argument for looking past the purchase price.
Things that change the maths for your home
- Your electricity tariff. Off-peak, controlled load, or running on solar can dramatically cut electric and heat pump costs.
- Whether you have solar. A heat pump scheduled for the middle of the day can run largely on free rooftop power.
- Household size and usage. A two-person home and a busy family of five sit at very different points on every cost curve.
- Rebates. Available incentives shift over time and by state, so check current programs rather than relying on old figures.
- Existing connections. If you’d be keeping gas connected only for hot water, factor the supply charge in. If you’d need to add gas or upgrade power, include that too.
What to do before you buy
Get the running cost estimate for your actual household, not a generic figure, and check what rebates apply where you live. The Victorian government’s water heating running cost comparison is a useful reference for how tariffs, household size and solar feed into the numbers, even if you’re outside Victoria the method translates.
One safety note: buying the unit is the easy part. Installing or swapping a hot water system, and any gas or electrical connection work, is licensed work. Don’t attempt it yourself. A licensed plumber will size the system to your household, confirm what your home’s power and space can handle, and make sure the install meets the rules.
The takeaway
The cheapest hot water system to buy is usually the most expensive to own, and the reverse is often true for heat pumps and solar. Compare upfront price, yearly running cost and lifespan together, factor in your tariff and any rebates, and you’ll see which option actually costs less over the years you’ll own it. If you want the numbers checked against your home before you commit, talk to a licensed plumber who can size the system and give you current figures.