The document compares the costs and benefits of solar water heating systems versus on-demand water heaters over a 30-year period. It finds that while solar systems have higher upfront installation costs that are about twice as much as on-demand heaters, solar systems provide greater overall savings and return on investment over the long run. Specifically, the analysis shows the solar system providing roughly twice the cumulative savings and a return of 31% compared to 18% for the on-demand heater. However, it notes the optimal choice depends on site-specific factors like solar access and water quality.

1. Solar Water Heating versus On-Demand Water Heater
I found an interesting article while “surfing” the internet the other day. If you surf much yourself
you’ve probably had the experience of finding something interesting while looking for something else
entirely. That’s what happened to me the other day and, because I thought you might also find this
interesting, I decided to make it the subject of this week’s article.
There’s a lot of marketing out there for “on-demand” or “instantaneous” water heaters. Much more, I
think it’s safe to argue, than for solar water heating. I know for a fact that one of the main reasons is
that on-demand heaters are made by large companies while most solar water heaters are made by
smaller companies with much smaller marketing budgets. Also, like solar electric systems, on-demand
water heaters are seen as new, advanced technology whereas solar water heating might seem sort of
“old hat.” As a result, I find people I speak with are more inclined to express interest in an on-demand
heater than they are a solar water heating system.
OK, back to that thing I found while surfing. This web site I stumbled upon was telling folks that on-
demand heaters aren’t always the “salvo” they’re characterized to be. But more importantly, they
compared an on-demand heater to a solar water heating system and found that solar, while about twice
as much to install, was more cost-effective than an on-demand heater. Having done cost-benefit
analysis of both these technologies in the past myself, I figured it wouldn’t take long to compare them
for you based on local costs. So here goes….
When comparing the cost-benefit it’s important to take into account not just the installation cost and
first year savings. While these two figures are often used for a “payback” analysis they leave out a lot
of important considerations including (but not limited to) fuel cost escalation and tax incentives like the
mortgage interest deduction (applies only to solar case). So the analysis here accounts for everything –
fuel cost and escalation rate (assuming propane), loan costs and credits, tax incentives, rebates, and
maintenance/replacement costs down the road.
The graph below compares the cumulative net cash flow over the course of a new home mortgage
financing scenario of 30 years assuming a fixed rate of 6.5%. The taller lighter colored bars represent
the solar water heater while the shorter darker colored bars represent the on-demand heater. The
“cumulative cash flow” for every year is the total of the accumulated savings minus the costs.
Given the assumptions used for this general case, the solar water heating system provides roughly twice
the savings over time. The “dips” you see in the cash flow for a given year – when compared to the
previous year - indicate a maintenance or replacement cost (for example the on-demand heater is
© Sustainable Energy Group Inc. 2008 Pg 1 of 3

2. replaced after 20 years). In terms of the return on investment, the solar water heating system provides a
return of about 31% whereas the on-demand heater provides a return of 18%.
Solar Water Heating vs On-Demand Water Heater
$32,500
$30,000
Cumulative Net Cash Flow
$27,500
$25,000
$22,500
$20,000
$17,500
$15,000
$12,500
$10,000
$7,500
$5,000
$2,500
$0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Years Into Loan
Now before anyone jumps to the conclusion that this is always the case I need to jump in and say “this
isn’t always the case!” The most obvious reason is the fact that not everyone has a good solar site.
Beyond that there are a variety of other site specific reasons and economic assumptions that could
change the “best choice” either way. I’ve touched on some of these reasons with regard to solar in past
articles.
In the case of on-demand heaters, water quality is often the reason we can’t install them, at least not if
we want the manufacturer to honor their warranty. Manufacturers of on-demand water heaters have
published water quality requirements that some well water in Nevada County doesn’t meet. Another
potential issue with an on-demand heater is that it requires a much larger gas line than a tank-type gas
water heater so, in the case of retrofit jobs, it could be expensive – sometimes not even feasible - to run
a new gas line. Likewise, the exhaust flue piping for an on-demand heater is typically larger and made
of a different material than a tank-type heater – it’s not just a matter of a simple replacement.
In some cases a solar water heating system used in conjunction with an on-demand heater may make
sense but, as usual, the answer is “it depends.” In general, the smaller the need for hot water the less
sense it makes to spend a whole lot for an on-demand backup heater if you’ve already purchased a solar
water heater and the reverse is also true. I should point out that when I say “makes sense” I’m
speaking purely in terms of economics.
If a home or business owner puts a high price on environmental value they’d probably be inclined to do
both, even if they had just an average hot water load. After all, a typical gas water heater puts about
3,000 lbs of CO2 into the atmosphere every year!
But it’s interesting to note that, if you’ve got a sunny location and a good place to put solar water
heating equipment, it’s far more cost-effective to go solar than it is to go with an on-demand water
heater.
Ray Darby is President of Sustainable Energy Group Inc., a Grass Valley company offering energy
efficiency and solar services for residential and commercial buildings, from comparing the alternatives
© Sustainable Energy Group Inc. 2008 Pg 2 of 3

3. through installation and servicing of energy systems of all types. You can reach him at 530-273-4422,
via email RayDarby@SustainableEnergyGroup.com, or visit their web site at
www.SustainableEnergyGroup.com.
© Sustainable Energy Group Inc. 2008 Pg 3 of 3