If you live in Victoria, chances are you have an electric storage system as your hot water heater. But, thanks to massive natural gas supplies in the Bass Strait, plenty of Victorian households are hooked up to gas too, and you might use it to heat your hot water. It’s less likely that you have solar hot water or a heat pump.

But why does it matter, and why should you care? In this article, we zoom out to answer a few questions about different hot water systems: how do they work, how much do they cost, and which one is right for you?

Electric hot water systems

There are two types of electric hot water systems: electric storage and instantaneous. Both heat water in the same way – they send electricity through an electric element, which generates heat.

The difference is that electric storage systems – again, the most common in Victoria – heat a whole tank of water and store it for when it’s needed. Although the tank is insulated, heat is still lost to the outside air, which means the system will use electricity, even if you don’t use hot water.

An instantaneous system uses a higher-powered element to heat the water on demand. That means it costs less to run than a storage system, since there’s no heat lost through tank walls. However, these systems struggle trying to run a house, and are usually reserved for smaller areas like kitchenettes. That’s on top of them needing significant time to heat up.

While electric systems tend to be among the most expensive to run, what they have going for them is that, typically, they’re the cheapest to initially purchase and install. That’s part of the reason that they’re the most common system in Victoria – despite their higher running costs.

Gas hot water systems

Gas hot water systems also come in storage or instantaneous models, which have similar benefits and drawbacks. To heat water, these systems use a gas burner.

A key difference between electric and gas systems is that gas hot water heaters require an Energy Rating Label. This label gives you an idea of how efficient the system is, with some instant systems earning as high as a 7-star rating. This label also features a Comparative Energy Consumption, which shows how much gas the system would use annually to heat 200L of hot water a day. By referring to that, you can easily see which model is the most efficient.


Since gas is currently cheaper than electricity, these systems cost households less to run. However, Victoria’s plentiful gas supply in the Bass Strait is in rapid decline, and the price of gas is expected to increase accordingly. This means that gas systems could, over time, become a worse economic option. Plus, they tend to cost more to install than electric systems.

Solar hot water systems

There was a time when solar hot water was seen as the best way for a household to heat water with less environmental impact, but that time has come to an end as heat pumps catch up.

There are two types of solar hot water: close-coupled and pumped. A close-coupled system has the water tank on the roof, and can be heated directly or indirectly.

Direct heating passes water through solar collectors, where it gets hotter and is then sent into the storage tank. That draws more cold water through the collectors, so the cycle can continue.

With indirect heating, the heated water is kept separate from the tank and mixed with an anti-freeze agent. A heat exchanger passes the heat from the water into the tank. This is typically used when frost is a concern, since water freezing in the collectors or tubes can damage the system. solar-hot-water

A pumped system is similar, with collectors on the roof, but it has the storage tank on the ground and uses a powered pump to move water between the collectors and the tank. If there’s space on the ground for the tank, this is typically the preferred setup. However, if you need a smaller ground footprint, then close-coupled will normally be used.

The sun doesn’t shine 24/7, so these systems need a booster – either an electric element or a gas burner. Solar hot water can deliver some cheap costs in summer, but it can’t totally eliminate them.

Another consideration is that the solar collectors take up roof space that could be used for solar panels. The collectors don’t generate electricity, unlike panels, so you limit the size of any solar system you might have. The smaller the solar system, the less electricity you can generate, and the less power costs you can offset.

Heat pump hot water systems

Hot water heat pumps work like a fridge in reverse. Essentially, hot air is collected by a refrigerant, sent through the system, and then passed into the water tank. This is an oversimplification, but you can check out a thorough explanation here.

What’s impressive about heat pumps is their efficiency. Standard electric heating has around 100% efficiency – that is, 1kW of electricity to create 1kW of heat energy. Top of the range heat pumps average 500% efficiency – essentially, if you switched from an electric storage system to a great heat pump, you’d be using 20% of your current electricity, and paying 20% of the cost. Combined with a solar system, this can even let you get hot water virtually for free.

Another plus is that the best heat pumps don’t require electric boosters, unlike solar hot water systems.

This is impressive technology that’s come about recently, which means this comes with a cost. A hot water heat pump can reduce your bills by the most of any hot water system, but they cost the most upfront. Rebates can save you quite a bit, but still, you’ll have to be prepared to pay. You can check out this article to learn just how much.


Chances are you’ve either got a gas or electric system right now. The ongoing costs for those systems are likely to go up as both electricity and gas gets more expensive. Right now, energy retailers are shifting towards eliminating flat rates and orienting towards having everyone on peak planning. This means hot water will get even more expensive during the day. Hot water systems are already a considerable ongoing expense, so it may be the right time to switch over.

If you do, our recommendation is an efficient heat pump. You save your roof space for solar, and you can get by without the hidden costs of a booster.

The other articles on our Learning Centre go into further detail on heat pumps, which can help you decide if it’s the right choice for you.

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