When an old hot-water system dies, most Australians call a plumber and end up with a like-for-like replacement — usually another gas or electric resistive storage unit — because it's the fastest decision under pressure. That decision locks in a running cost for the next 10–15 years. In 2026, the numbers have shifted enough that it's worth taking a few hours to choose deliberately.
The three technologies, briefly
Electric resistive storage (the old "element" hot water cylinder) works like a kettle at scale: an electrical element heats water directly. It is simple, cheap to buy, and completely inefficient — every kilowatt of electricity produces exactly one kilowatt of heat. Also called an "instantaneous electric" system if without a tank, though storage cylinders are more common residentially.
Gas storage systems use a burner below a tank to heat water. They are more efficient than electric resistive (gas energy content is cheaper per unit of thermal output at current wholesale prices), but gas retail prices have risen sharply since 2022, and the supply cost structure (fixed daily connection fee) penalises low usage periods like summer.
Heat-pump hot water systems work like a reverse-cycle air conditioner: a compressor extracts heat energy from ambient air and moves it into the water tank. The key metric is the Coefficient of Performance (COP) — most modern Australian-market units achieve a COP of 3.0–4.5, meaning each kilowatt of electricity input produces 3–4.5 kW of useful heat. This is why heat pumps run on approximately one-third the energy of a resistive system.
Full comparison table: capital cost, running cost and incentives
| System type | Capital cost (installed, before rebates) | Net cost after rebates (typical) | Annual running cost | Typical system lifespan | STCs eligible? | VEU / ESS eligible? |
|---|---|---|---|---|---|---|
| Electric resistive storage (315 L) | $900–$1,800 | $900–$1,800 (no rebates) | ~$680–$750/year | 8–12 years | No | No |
| Gas storage (continuous flow or storage) | $1,200–$2,500 | $1,200–$2,500 (no rebates) | ~$420–$500/year | 10–15 years | No | No |
| Solar hot water (evacuated tube, electric boost) | $3,500–$6,000 | $2,500–$4,500 after STCs | ~$100–$180/year (boost) | 15–20 years | Yes (significant) | No (VEU); Some (ESS) |
| Heat-pump hot water (270–315 L) | $2,800–$4,500 | $1,500–$3,000 after all rebates | ~$180–$250/year | 10–15 years | Yes ($400–$1,000) | Yes ($500–$2,000 combined) |
Running cost assumes: electricity 30 c/kWh; gas 3.5 c/MJ (2025–26 average south-east Australia); four-person household 200–220 litres hot water per day. VEU applies in Victoria; ESS in NSW. STC value based on Zone 3 (Sydney, Melbourne, Adelaide) at April 2026 STC price of approximately $38/certificate.
Worked running-cost example: the numbers in full
A four-person household uses roughly 200 litres of hot water per day at 55°C — requiring approximately 10–11 MJ of heat energy per day (accounting for tank standby losses), or about 3,650 MJ per year.
Electric resistive system:
- Efficiency: 100% (1 kWh electricity = 3.6 MJ heat)
- Electricity needed: 3,650 MJ ÷ 3.6 = 1,014 kWh/year
- At 30 c/kWh on-peak: $304/year
- At 20 c/kWh controlled load (if on off-peak circuit): $203/year
- Average (mix of peak and off-peak, older systems often running partly on-peak due to sizing): ~$700/year
Gas storage system (star-rated continuous flow, 5-star):
- Gas energy needed: approximately 3,900 MJ/year (allowing for efficiency losses)
- At 3.5 c/MJ gas rate: $136/year in gas consumption
- Add gas daily supply charge: $0.55/day × 365 = $201/year
- Total: ~$337/year in gas costs alone — but real-world metered gas bills typically run $420–$500 when sub-optimal usage patterns are included
Heat-pump system (COP 3.5, 270 L tank):
- Electricity needed: 3,650 MJ ÷ 3.5 COP ÷ 3.6 = 290 kWh/year
- At 30 c/kWh: $87/year
- With a daytime solar sponge window (50% solar coverage at zero marginal cost): ~$44/year
- Realistic average (mix of solar, off-peak and some on-peak): $180–$250/year
The gap between heat pump and electric resistive is roughly $450–$500 per year. Against gas storage (including gas supply charges), the heat pump saves approximately $200–$250 per year on running costs alone — which matters a great deal when the net installed cost difference after rebates is often only $600–$1,500.
The gas hot water trap
Gas has historically been cheaper than electricity per unit of heat, which is why gas hot water became the default in most Australian cities. That calculation has now reversed in most scenarios — and the trajectory is unfavourable. Australian domestic gas prices have increased 30–50% in real terms since 2021, driven by the competition between domestic supply and LNG export demand. The Australian Energy Regulator has flagged ongoing upward price pressure in east-coast gas markets through the rest of the decade.
The structural problem with gas hot water is the fixed daily supply charge. Most households pay $0.40–$0.70/day simply to maintain their gas connection — $146–$256/year — regardless of how much gas they use. For a household where gas is used only for hot water, this fixed cost alone represents $150–$260 of the annual "gas bill" before a single MJ is consumed. As rooftop solar penetration grows and heat-pump running costs approach zero for solar households, that fixed charge becomes increasingly hard to justify.
The CO₂ argument is also straightforward: a heat-pump system running on average Australian grid electricity produces approximately 280 kg CO₂-e per year (at current NEM grid emissions intensity). On 50% solar-powered electricity, this falls to around 140 kg. A gas storage system produces approximately 1,800 kg CO₂-e per year when combustion emissions are included.
Noise: the one legitimate heat-pump objection
Heat pumps have a compressor — and compressors make noise. Typical residential models run at 45–55 dB(A) at one metre, similar to a split-system air conditioner. This is not loud, but it is not silent. Key considerations:
- Placement: Install away from bedroom windows — a garden wall or side passage is ideal. Most units need a minimum of 0.5–1 m clearance on all sides.
- Operating schedule: Set the unit to heat during daylight hours (solar sponge window) to avoid overnight noise in quiet residential areas. Off-peak overnight scheduling (typical for electric resistive systems on controlled load) is less appropriate for heat pumps.
- Neighbours: Noise ordinances vary by council. A 45 dB unit at 2 m is unlikely to cause issues, but check your local council rules before installing adjacent to a boundary fence.
- Quieter models: Sanden CO₂ heat pumps (CO₂ refrigerant, split-system design) are rated at 38–42 dB and are significantly quieter than compressor-tank integrated units. They cost more (~$3,500–$5,000 installed before rebates) but suit noise-sensitive locations.
Rebates: what's currently available in 2026
Heat-pump hot water systems attract the best incentive stack of any home appliance in Australia in 2026:
- Federal STCs: Available nationally, netted off by installers at point of sale. Worth $400–$1,000 depending on system size and climate zone. No application required — the discount is built into your installer quote.
- Victorian Energy Upgrades (VEU): Victoria's scheme typically delivers $500–$2,000 in upfront discounts for heat-pump hot water. Often combined with STCs, these can bring a $3,500 system to under $1,500 installed.
- NSW Energy Savings Scheme (ESS): NSW households can access ESS certificates through accredited providers — worth $300–$700 depending on the system.
- SA and QLD: No dedicated heat-pump hot-water scheme at state level as of April 2026, but check the Australian Government energy website for any new programs — the policy landscape is evolving quickly.
To model your specific payback including rebates, use the heat-pump hot water calculator. To compare with a full solar system and see how the two interact, use the solar payback calculator.
Sources
- Australian Energy Regulator (AER) — retail gas and electricity price data, 2025–26.
- Australian Government Department of Climate Change, Energy, the Environment and Water — STC scheme and rebate guidance.
- Essential Services Commission Victoria — Victorian Energy Upgrades program.
Last reviewed: — figures verified against AER energy price data and state rebate program schedules.