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Gas has been the go-to option for hot water in Australian homes for decades. But with energy costs taking a bigger bite out of household budgets, is sticking with gas still the smartest choice?
For many Australian households, a heat pump hot water system is cheaper to run than gas. Heat pumps use electricity to transfer heat from the surrounding air into water, making them highly energy-efficient. Gas hot water systems can cost less to install upfront, but their ongoing running costs can add up.
The best option depends on more than just your energy bill. Your household's hot water usage, electricity and gas tariffs, location, existing solar panels and available government incentives all play a part.
So, before you replace your old hot water system, let's compare the costs, benefits and practical differences between heat pumps and gas.
Heat Pump vs Gas Hot Water: At a Glance
Your actual costs and system performance depend on the model, installation, climate, energy plan and household usage.
How Do Heat Pump and Gas Hot Water Systems Work?
Both systems deliver the hot water you need for showers, washing and everyday household activities. The big difference is how they heat that water.
How a heat pump hot water system works
A heat pump works a little like your fridge, but in reverse.
Instead of moving heat out of an enclosed space, it extracts warmth from the surrounding air and transfers that energy into a water storage tank.
The system uses electricity to operate a compressor and fan, but much of the heat going into your water comes from the air itself.
That's where the efficiency advantage comes from.
According to the Australian Government's YourHome hot water guide, heat pump systems commonly achieve a coefficient of performance (COP) of around 3 to 5.
In simple terms, a heat pump with a COP of 3 delivers approximately 3 kWh of heat energy for every 1 kWh of electricity consumed under the relevant operating conditions.
Performance varies with temperature, equipment, and how the system is operated.
How gas hot water systems work
Gas hot water systems take a more traditional approach. They burn natural gas or LPG to heat water.
There are two main types:
- Gas storage systems: Heat water and store it in an insulated tank until it's needed.
- Gas continuous-flow systems: Heat water as you use it, rather than maintaining a full tank of hot water.
Continuous-flow systems are particularly convenient for households that want hot water without relying on a storage tank. Provided the system is correctly sized, they can supply hot water continuously while fuel and water remain available.
However, gas systems lose some energy through combustion and, for storage models, heat escaping from the tank.
Unlike heat pumps, they generate heat by burning fuel rather than transferring existing heat from the air.
Heat Pump vs Gas Hot Water Running Costs: Which Is Cheaper?
Here's where things get interesting.
The price of buying a hot water system is only one part of the equation. What you spend keeping it running over the years can have a much bigger impact on your household budget.
Heat pumps generally use much less purchased energy to deliver the same amount of hot water, giving them an advantage over traditional gas systems.
But comparing the cost of gas and electricity isn't as simple as comparing the prices printed on your bills.
Gas is typically billed in megajoules (MJ), while electricity is billed in kilowatt-hours (kWh). You also need to consider how efficiently each system converts purchased energy into useful hot water.
An example of annual running costs
Let's look at a simplified comparison using the same daily heating requirement.
Assume a household needs 10 kWh of useful heat for hot water each day.
Under these assumptions, the heat pump costs approximately $253 less per year in purchased energy.
Important: These are illustrative calculations, not current national average prices or a Smart Energy savings estimate. They exclude daily supply charges, equipment maintenance, installation costs, tank and pipe losses, and changes in performance. Actual electricity and gas tariffs can differ substantially.
If you have rooftop solar, the heat pump's grid-electricity costs may be lower again.
There's another potential benefit worth considering. If hot water is your home's last gas appliance, switching to electricity may eventually allow you to disconnect gas entirely and avoid ongoing gas supply charges. Any disconnection fees and remaining gas appliances need to be considered first.
Compare the long-term cost, not just the initial quote
When weighing up heat pump versus gas hot water costs, compare:
- The installed cost after eligible incentives.
- Expected annual running costs using your household's energy tariffs.
- Manufacturer warranties and installer workmanship coverage.
- Maintenance, servicing and potential repair expenses.
- How long you expect to remain in the property.
- Any future plans to install solar or move away from gas.
A cheaper installation today doesn't necessarily mean a cheaper hot water system over its working life.
How Much Does Heat Pump Installation Cost Compared With Gas?
Heat pumps generally have a higher purchase and installation cost than straightforward gas replacements.
For perspective, the NSW Government's heat pump guidance provides an indicative installed cost range of 2,000–6,000, depending on the system, model and installer.
That's a NSW reference, not a nationwide quote or a confirmed Smart Energy price.
A gas replacement may involve less upfront work if the home already has a suitable gas supply and the replacement uses the existing installation location. However, upgrades to pipes, meters, ventilation or other components can increase the cost.
For a heat pump, installation costs depend on factors including tank capacity, equipment selection, plumbing modifications, electrical requirements, site access and positioning.
The important question isn't simply which system has the lowest sticker price.
It's which system delivers the best long-term value for your home.
Can You Get Government Rebates for Switching From Gas to a Heat Pump?
Potentially, yes.
Eligible Australian heat pump water heaters can qualify for federal Small-scale Technology Certificates (STCs), which may reduce the upfront purchase price when assigned to a registered agent.
The Clean Energy Regulator maintains the register of eligible water-heater models.
Additional state-based incentives may also be available.
New South Wales
The NSW Energy Savings Scheme currently provides an indicative discount of up to $330 for eligible households replacing a gas water heater with an air-source heat pump.
The actual discount depends on eligibility, the equipment, the installer and the installation.
Check the NSW hot water upgrade incentive for the latest conditions.
Victoria
Eligible Victorian households may access discounts or rebates through the Victorian Energy Upgrades and Solar Homes programs.
There is also an important regulatory change approaching.
From 1 March 2027, Victorian requirements generally prevent replacing an existing residential gas hot water system with another gas system when replacement is necessary, subject to applicable exemptions.
You can review the details through the Victorian Government's building electrification guidance.
What about other Australian states?
Incentives and eligibility vary across Australia. Not every household qualifies, and not every model is approved under every scheme.
Before committing to an upgrade, check the available incentives for your postcode and ask your installer to show exactly which discounts are included in the quote.
Incentive information reviewed November 2026. Government programs and conditions can change.
Have Solar Panels? A Heat Pump Could Make Even More Sense
Already generating electricity from your roof?
This is where heat pump hot water becomes particularly attractive. A gas water heater relies on gas regardless of how much solar electricity your home produces.
A heat pump, on the other hand, uses electricity. That means your rooftop solar panels can help power the system.
With a compatible heat pump and suitable controls, you may be able to schedule water heating during daylight hours when your solar panels are generating electricity.
Instead of exporting all your unused daytime solar electricity to the grid, you can use some of it to heat water for later.
Your insulated tank effectively stores energy in the form of hot water.
Of course, solar electricity isn't automatically cost-free. Using it for hot water means giving up any feed-in tariff you could have earned by exporting that electricity. You may also need grid electricity when solar generation is insufficient.
Still, for households with suitable solar generation and hot water demand, daytime heating can be a smart way to make more use of the energy produced at home.
Are Heat Pumps Better Than Gas in Cold Weather?
One common concern is whether heat pumps can keep up during winter.
The good news is that heat pumps don't require hot outdoor temperatures to work. They can extract usable heat from cooler air. However, their efficiency generally decreases as outdoor temperatures fall, and some models may rely on an electric booster under certain conditions.
That's why choosing equipment suited to your local climate matters.
For homeowners in colder parts of Australia, look closely at the manufacturer's published operating-temperature range, winter performance and recovery times.
A system that performs well in coastal Queensland may not be the ideal choice for a household experiencing frequent freezing temperatures.
When Might Gas Hot Water Still Make Sense?
While heat pumps have a strong efficiency advantage, gas isn't automatically the wrong choice for every household.
A gas continuous-flow system may still be practical when:
- Your existing gas system is functioning well and doesn't yet need replacing.
- You have limited space or no suitable position for a heat pump.
- You need a compact system without a large storage tank.
- Your hot water demand is irregular and low enough that a continuous-flow system suits your needs.
- Local installation or electrical constraints make switching more complicated.
Location and regulation also matter, particularly in states introducing restrictions on new gas installations or replacements.
The key is to assess the complete situation rather than assuming that every home needs the same solution.
What Should You Check Before Replacing Gas Hot Water With a Heat Pump?
If you're considering the switch, a little planning can save you from an expensive mismatch.
Here are the details worth discussing with your installer:
- Household hot water demand. How many people live in your home, and when do they typically shower or use hot water?
- Tank size and recovery rate. Will the system store and replenish enough hot water for busy mornings and evenings?
- Installation location. Is there adequate ventilation, drainage, space and access? Could operating noise disturb bedrooms or neighbours?
- Electrical requirements. Will the property require electrical upgrades or new circuits?
- Solar compatibility. Can your selected system use a timer or compatible controls to make better use of daytime generation?
- Warranty and support. What is covered by the manufacturer's product warranty and the installer's workmanship warranty?
- Total installed cost. Does your quote include removal of the old system, plumbing, electrical work, commissioning and applicable rebates?
A correctly sized, well-supported system is usually a better investment than choosing solely on the lowest advertised price.
What About Electric and Solar Hot Water Systems?
Gas and heat pumps aren't your only options.
Conventional electric storage systems use a heating element to warm water. They're often relatively inexpensive to install but generally consume considerably more electricity than heat pumps for the same useful heating output.
Solar-thermal hot water systems use rooftop collectors to heat water directly, usually with a booster for periods when sunlight isn't sufficient.
That's different from powering an electric heat pump using rooftop solar PV panels.
Each approach has its place, but for households considering a move away from gas, heat pumps offer an attractive combination of energy efficiency and potential solar integration.
Frequently Asked Questions
Heat Pump or Gas Hot Water: What's the Smarter Choice?
For many Australian households, a heat pump is worth serious consideration when it's time to replace an ageing gas hot water system.
Its energy efficiency can help reduce ongoing costs, and the ability to use electricity from rooftop solar adds another potential advantage.
But a good hot water upgrade isn't simply about changing energy sources. It's about choosing a system that works for your household's needs, property and budget.
That's where the right advice makes all the difference.
Thinking about making the switch?
Explore Smart Energy's hot water heat pump systems and speak with our team about an option suited to your home.
