When the time comes to replace your old water heater you may want to consider your options regarding what fuel type to use. Each fuel type has its own set of pro's and con's. If you are building a new home or doing a major remodel this is a good time to do some research and decide which is the best for your situation.Many times you won't have a choice, you may live in an area that doesn't have natural gas or another fuel source available. However, if you are lucky enough to be able to choose, this is a good time to gather information to determine which is right for you.Best Water Heater Fuel Type Quick Navigation Best Water Heater Fuel TypeElectric Water HeatersNatural Gas Water HeatersHeat Pump Water Heaters Energy RatingsTankless Water Heaters There are 3 main fuel types that power water heaters: Electricity, Gas and Heat Pumps. However, others are available, such as solar, which is less common but popular for individuals who like to live off the grid or minimize their energy consumption.Natural Gas and Propane (LP) are not the same fuel source, however, the water heater itself operates in the same manner. Because of this, we will refer to both as natural gas.Heat pumps are an excellent choice for the right circumstances, but they are not as common as electric and gas fueled water heaters. Below is a comparison chart between these 3 types of water heaters: ElectricNatural GasHeat Pump Cost LeastExpensiveHigher thanElectricMostExpensive Heating MethodHeating ElementsGas BurnerExtracts heatfrom airSizeCapacity28 to 100+gallons30 to 100gallons50 to 80gallonsEfficiencyFactor.90 to .95.58 to .702.0Average AnnualOperating Cost$500$250$130 Electric Water HeatersElectric water heaters are very popular and they are the least expensive to purchase. There are generally two heatings elements used to heat the water, one in the upper region of the tank, and the other in the lower. Since there isn't a pilot light and combustion doesn't occur, there aren't as many safety precautions to be concerned with. However, safety still needs to be observed, and the T&P relief valve should be checked on a regular basis.Occasionally, the heating elements will need to be replaced. They are inexpensive and it's a task that is relatively easy for most homeowners to undertake. Performing maintenance on a regular basis can help prevent sediment build-up and extend the life of the lower heating element, as well as the water heater in general.Electric water heaters have a wide range of sizes to choose from, with a tank capacity ranging from 28 to over 100 gallons, there are plenty of options to find the tank that best meets a home's hot water demands. The average household will spend about $500 a year heating hot water with an electric water heater. Although this is double the amount spent for a gas water heater, the added expense has more to do with fuel costs than the efficiency of the unit. Fuel EfficiencyThe Efficiency Factor (EF) is a universal measurement that accesses the amount of energy that is used to heat your water. So, for a water heater with an EF rating of .58, the amount of energy being converted to heat is 58%.The higher the EF score, the more energy efficient the water heater, and the more money it will save you in fuel expenses. See below for more details on energy efficiency. Although electric water heaters are more energy efficient, they are also more expensive to operate. This is due to the cost of electricity. Currently the price of gas is lower than the price of electricity. But it should be noted that electricity is considered to be a more stable energy source with less fluctuations in price. Natural Gas Water HeatersNatural gas and propane (LP) water heaters are generally more expensive to purchase than electric models. But because of the lower fuel costs of gas, they are less expensive to operate. Keep in mind that the lower operating expenses does not mean they are more efficient. In fact gas fueled units typically receive lower EF ratings.A gas water heater will heat the water with a gas burner which is within the tank. Each time the water temperature falls below a set level, a gas burner will ignite to bring the water back up to the desired temperature. A pilot light is used to ignite the gas for the burner to heat the water. There are several different types of pilot lights available.An older style traditional pilot light is usually used in lower-end heaters. A match is often needed to relight the pilot if it is extinguished. Newer models typically have an ignitor or electronic ignition instead of the traditional pilot light. They are more efficient and can be lite by pushing a button. Gas water heaters have many options regarding tank capacity. Tank sizes range from 30 to 100 gallons.From a safety standpoint, gas fueled units have a few additional concerns. There must be adequate ventilation where the unit is installed and combustible materials should never be stored near the water heater.Natural gas and even propane are not available in all areas which restricts your selection of these fuel types. However, even if you have the ability to change from electric to gas, it may not be cost effective to make the switch.Because of the criteria on energy efficiency, there are generally a larger selection of ENERGY STAR gas water heaters available than electric units. Heat Pump Water Heaters Heat pumps are more expensive than gas and electric water heaters. However, they also provide significant savings in future utility bills, which helps offset the initial cost. Because they are capable of achieving incredible energy efficiency they are also the least expensive water heater to operate. Unlike a gas or electric water heater that generates heat for the sole purpose of heating water, a heat pump will use electricity to move heat from one place to another. This makes them capable of achieving 2 to 3 times more energy efficiency than the traditional units.Heat pumps are designed to "pull" heat from the surrounding air, and then "drop" it into the tank to heat the water. They work like a refrigerator, only in reverse. With a refrigerator the heat is "pulled" from inside and then dropped into the surrounding air.Heating elements can be used in two ways with heat pumps:Hybrid mode - This is where the heating element will kick-in to help the unit quickly recover when a large amount of water was drawn from the tank. Back-up mode - This is when the unit uses only electricity as a fuel type and the heat pump functions as an electric water heater. This mode is used when there is limited ambient heat available.Heat pumps have a tank capacity that is a bit tighter than other water heaters, although not significantly. They range from 50 to 80 gallons.Special Installation ConsiderationsHeat pumps do not operate efficiently in cold areasThey need to be installed in an area where the temperature range is between 40-90 degrees FahrenheitTo maximize their efficiency, it's best to install them in a room with excess heat, such as a furnace roomA heat pump is often larger than a gas or electric traditional water heater Energy Ratings When selecting a water heater, it's important to consider energy ratings. An Energy Factor Rating (EF) measures the water heaters overall efficiency by considering 3 factors.Stand-by Losses: The amount of heat lost per hour. Measured by a percentage it compares the stored water to the content of the water.Recovery Efficiency: A measurement of how efficiently the heat from the energy source (gas, electricity, etc.) is transferred to the water.Cycling LossesENERGY STAR – When a water heater earns an ENERGY STAR rating the initial price is often more expensive. However, since the unit will operate more energy efficiently there will be larger savings in fuel costs over the life of the unit. NAECA – On April 16, 2015 the U.S. Department of Energy changed the water heater regulations. This was done to increase the minimum energy-efficiency standards. This video will give you a quick overview of the NAECA (National Appliance Energy Conservation Act) changes and how these changes may affect you. Tankless Water Heaters Tankless water heaters can be an excellent choice when replacing and upgrading your water heater. They are available in electric as well as natural gas and propane options. Tankless units tend to be more expensive, but they are also very efficient and can be installed in tight spots since they require minimal space. Check out our Tankless Buyers Guide HERE. Deciding to go tankless is a big decision and you should spend some time learning the pro's and con's. The option to switch may not be available to you without making major upgrades to your home.