Heat Pump Water Heaters Save Money & Are Better For You

MORE EFFICIENT.   Just as heat pumps warm the air in your house, heat pump water heaters (HPWH) heat your water for showers, dishwashing, laundry and other needs. Because they don’t create heat, only collect it from the surrounding air, they are 2-3 times more efficient than most current hot water systems. HPWHs can save you hundreds of dollars per year. Use this calculator to see how much you can save.


Black and white photo of two young children in the bathtubHEALTHIER.   They can also be better for your health compared to methane (natural) gas and propane heaters. The least expensive gas water heaters use atmospheric venting (no fan) and waste energy by venting warm air, combustion gases like CO2, carbon monoxide, nitrogen oxides, and acidic water vapor through a pipe, chimney or flue to the outside. If the venting system is improperly installed, backdrafting may occur, in which exhaust gases are pulled back into the house.

According to one contractor, “this is a common defect identified during home inspections, and it’s almost always a condition that the homeowner or occupant is not aware of.” Another site notes that backdrafting can start after sealing the house for leaks during weatherization; the water heater, unableto get enough air for combustion, pulls it back through the flue. This is not only a health hazard, but the corrosive liquid can eat through metal and cause the heater to leak.

 

What will a Heat Pump Water Heater (HPWH) Cost?

Installing a Heat Pump Water Heater (HPWH) costs more than gas and electric water heaters, many of which are low-to-medium efficiency.  Luckily there are incentives that make HPWHs much more competitive. They may also be more affordable to run. Upcoming rules in 2029 will require higher efficiency gas water heaters, and electric water heaters will have to have heat pumps.

The New Buildings Institute estimates these national average costs for installing different kinds of water heaters (2025 report). DIY would lower installation charges.

 

The table below illustrates what different New Mexicans might pay for this Consumer Reports recommended Smart Buy  A.O. Smith Signature 900 50-gallon HPWH priced at Lowes for $1,550 (May 2026). Note: Most other HPWH are more expensive.

If you don’t already have an electric water heater there may be additional costs for adding a 240V line or buying a more expensive 120V model if appropriate. See more details and tips below.

At higher income levels
a PNM customer might receive a $650 discount for a 55 gal or smaller model through a PNM Midstream contractor and up to $350 as a nonrefundable NM tax credit for a total for $1,000 off. If the customer replaced a 2016 or older water heater and enrolled in the PNM Home Energy Checkup program before the switch they would get a $300 rebate as well for a total of $1,300 off.  This assumes the taxpayer has a NM tax liability of at least= $350.  (Midstream: $1,550 – 650= $900; Tax credit: 50% of $900 = $450, but max allowed is $350 so $900-$350=$550).
With the PNM retirement rebate of $300, the final cost would be $250, cheaper than most other kinds of water heaters including gas.
An Otero Electric Coop member would receive the NM tax credit of $350 and a Coop rebate of $500, for $850 off for a price of $700.
A limited income household
or one living in affordable housing might qualify for a NM HEAR rebate of up to $1,750 through a HEAR contractor. A refundable NM tax credit of $700 would also be available, for a total of $2,450 off even if the resident owes no money in NM taxes. This results in essentially a $0 product cost and some or all of the labor costs covered.

Incentives

NEW MEXICO STATE: Heat Pump Water Heater Incentives

  • NM Sustainable Building Tax credit
    • Affordable Housing and income limited residents (<200% of Federal poverty level) receive 100% of HPWH cost and installation up to $700 per HPWH. This is a refundable tax credit.
    • Non-affordable Housing and non-income limited residents get 50% of product and installation cost up to $350/HPWH.
      Model must qualify for Energy Star.

      • Getting the tax credit is a two step process:
        1. Apply for a Certificate of Eligibility as soon as the project is over.
        2. File this certificate with your taxes the following April. Extremely useful document details the project and document requirements you will need. Get these before the installer leaves.
    • Tip: Make sure the model number, water heater type (hybrid or heat pump) and name of the water heater on the invoice exactly matches that on the Energy Star label.
    • Programs for new construction and manufactured housing started Jan. 1, 2022.
  • NM HEAR rebate for Income Limited Residents at point of sale (discount on invoice).
    • NM state HEAR Rebates for income-limited households will be 100% of the cost up to $1,750. The total HEAR rebates across all qualified electrification projects are capped at $14,000 per household. Calculator to determine if you qualify for low-income rebates in New Mexico. Check back to state website to see when HPWH will be available for rebates.
    • See if you qualify for the program. (80% AMI; Eligibility Checklist)
    • Model must qualify for Energy Star
    • Must be installed by an Authorized Program Contractor. Check back to see when this list will become available.

ELECTRICITY PROVIDER REBATES

Other rebate finders: ENERGY STAR Incentives webpage,  DSIRE.

These incentives make HPWHs very competitive with other types of water heaters.  Our May 2026 informal survey of Lowes and Home Depot 50-gallon residential water heaters found the following price ranges for different kinds of water heaters: natural gas ($700-$1500), electric ($590 -$1400), propane ($869-$1450), super high efficiency condensing gas/propane ($1600 – $2000) and heat pump ($1600-$2600).

FEDERAL TAX CREDITS BELOW WERE RESCINDED

  • Federal (Rewiring America page on HPWH) EXPIRES DEC. 31, 2025.
    • In order to qualify for the Federal incentives, a model must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency at the beginning of the year you install the HP Water Heater.  Check for your model in this database or see if it qualifies for an Energy Star Rating (advanced tier).
    • Nonrefundable Tax Credits (25C) are 30% of the cost of the heat pump water heater up to $2,000, but that $2,000 cap is for heat pumps and HPWHs combined each year.  Resets each tax year. There is also a 30% tax credit up to $600 for an electrical panel upgrade, but only if it’s upgraded in conjunction with another upgrade covered by 25C (like a heat pump water heater).
    • The credit is on the cost minus any rebates you received from utilities or coops.
    • Nonrefundable means you must owe the amount of the credit in taxes in order to get the credit taken off your taxes.
    • The State tax credit is “stackable” or independent of the Federal credit.  You do not have to subtract the state credit from the cost before you take the Federal credit.

 

What to know before you buy

  • Capacity. In general, you should increase your HPWH tank size by one unit compared to traditional electric or gas heater because HPWHs heat at a slower rate. So replace a 40-gallon tank with a 50 gallon or higher size. However raising the tank temperature from 125°F to 140°F adds an equivalent amount of available hot water as increasing tank capacity by about 10 to 15 gallons. A mixing valve can then lower the temperature at the faucet when needed by mixing the hot water with cooler water to avoid scalding. Some HPWH already contain  mixing valves (especially 120 V models). If not, one can be installed in the hot water supply line. This costs ~$100 + 1/2 hr of labor and may have to be replaced once during the HPWH lifetime.
  • Location. HPWHs will cool the room they are in. The cool air they expel can be vented outside if this is a problem. They perform best in locations that remain in the 40–90°F range and that have access to 750 – 1,000 cubic feet of air (so closets are not ideal unless there are vents to the outside. Add louvers to closet doors if no other places are available). They also need a drain or pump for the clean condensate water the HPWH releases. 
  • Size. Be aware that HPWHs can be larger and taller than conventional water heaters. If space is limited, consider an ENERGY STAR certified split system (see photo).  Nyle and Eco2 Systems make split system HPWHs with a separate outside unit or condenser. 
  • Consider a smart recirculating system to deliver hot water faster right when you need it especially in large houses. Do not install a continuously operated circulation pump which would force your HPWH into electric backup mode which uses a lot more energy.
  • If you are replacing a gas water heater with a HPWH, you may have to upgrade your electrical panel and wiring because HPWHs typically require a hardwired, dedicated 240 Volt circuit. Also, for many homes, adding a 30-Amp appliance means an electrical panel upgrade to accommodate more current.  However, there are now 120 volt HPWH models that plug into a standard outlet.  More information on 120 volt models is below. 
  • Search for “heat pump water heater” or “Hybrid High Efficiency” when shopping for a HPWH. Most heat pump water heaters are called hybrid because they come with an electric heating element as backup when a lot of hot water is needed all of a sudden.
  • Noise. If the water heater is going to be near  bedroom or other living space, might want to look at noise ratings.
  • Federal Tax Credit has expired: In order to qualify for the Federal Tax Credit, a model must meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency at the beginning of the year you install the HP Water Heater.  Check for your model in this database or see if it qualifies for an Energy Star Rating (advanced tier).

Resources 

Electrify Now webinar on Heat Pump Water Heaters

CleanTechnica  A Heat Pump Water Heater is the energy saving equivalent of 7 solar panels and costs ⅙ the price.

Advance Water Heating Initiative has Resources for single- and multifamily housing.

ENERGY STAR resources. Consumer Reports HPWH ratings.

CleanTechnica Dec 2022 review of the Voltex AL HPWH

Canary Media Finally, a heat-pump water heater that plugs into a standard outlet.

The Uniform Efficiency Factor (UEF) indicates how many units of energy a water heater produces for every energy unit put in. A typical heat pump water heater UEF is 4.02 versus 0.60 for gas, 0.81 for instant gas, and 0.92 for electric.  Energy Star UEF Criteria

Shopping and Installing

Note: Some tax credits require an inspector to sign off on an installation. Make sure your contractor is a certified electrician and a certified plumber.

Search for “heat pump water heater” and “Hybrid High Efficiency” when shopping.