You can also save with the right conventional water heater. Models we cut open in past tests confirmed that electric heaters with nine- to 12-year warranties usually have larger heating elements, thicker insulation, and beefier corrosion-fighting anodes. Got a gas or oil heater? Gas is relatively inexpensive, but replacing a broken oil water heater with a hybrid electric could save $325 in annual costs, about the same as if you replaced an all-electric heater. Here's what else to consider:
The federal tax credit for hybrid heaters and nonelectric tankless systems will soon run out, but the one for solar heaters lasts through 2016. You'll also find state and local rebates for Energy Star storage-tank models. Go to www.dsireusa.org for a state-by-state list, or check out the Energy Star rebate locator.
Hybrids tend to be taller than conventional heaters, since the heat pump is usually on top. Models we tested need as much as 7 feet from floor to ceiling and up to 1,000 cubic feet of uncooled space to capture enough heat from the air. You'll also need a condensate pump (about $150) if there's no drain nearby. And remember that hybrid heaters are noisier, exhaust cool air, and can rob some heated air in winter.
Certification from the Solar Rating and Certification Corp., an industry group, is all you need for the federal tax credit and many state and local rebates. But Energy Star models also qualify and should pay off sooner.
Cooler ground-water temperatures reduce a tankless heater's output. Have a pro use your lowest ground-water temperature to calculate how much capacity you'll need.