Heat Pump vs Gas Hot Water — Running Costs & Payback (2026)

If you're weighing up a heat pump vs gas hot water system for your Victorian home, the short version is this: a hot-water heat pump almost always wins on running cost, and switching away from gas also lets you shed a daily supply charge you're paying whether you use much gas or not. But "wins on running cost" and "worth replacing today" aren't the same thing — the upfront price, the rebates you can stack, and the age of your existing unit all decide whether the switch pays off. This guide walks through how each system works, what they actually cost to run, the rebates available in Victoria in 2026, and a realistic look at payback so you can decide whether now is the right time.

How each system heats your water

A gas storage hot water unit burns natural gas (or LPG) under an insulated tank, keeping a few hundred litres hot and ready around the clock. It's a mature, reliable technology, but it loses heat through the tank walls between uses and, importantly, you keep paying a daily gas supply charge to stay connected to the network.

An electric storage unit does the same job with a resistive element — essentially a giant kettle. It's cheap to buy but expensive to run, because every unit of electricity becomes roughly one unit of heat and nothing more.

A heat pump hot water system works completely differently. Rather than generating heat directly, it moves heat from the surrounding air into the water tank, using the same refrigeration cycle as your fridge or a reverse-cycle air conditioner running in reverse. Because it's relocating ambient heat rather than creating it from scratch, it can deliver three to four units of heat energy for every unit of electricity it draws. That efficiency — measured as the Coefficient of Performance, or COP — is the whole reason a heat pump is so cheap to run. Premium CO₂ (R744) split systems push that efficiency further and cope better with cold Victorian mornings, separating the compressor from the tank so the noisy bit sits outside.

Why moving heat beats making it

It helps to picture what's happening inside, because once you understand it the running-cost figures stop looking too good to be true. A fan draws outside air across an evaporator filled with a refrigerant that boils at a very low temperature, so even a cool morning is warm enough to make it evaporate and absorb heat. A compressor — which uses most of the electricity — squeezes that gas to make it hot; that heat passes through a condenser into the tank, and the refrigerant then expands, cools and starts the loop again. The key insight is that the electricity isn't being turned into heat — it's being used to pump heat that was already in the air, which is why a COP of three to five means three to five units of heat for a single unit of paid-for electricity, where a resistive element can only ever manage one. The trade-off is that it's slower and more mechanical than a gas flame, so it relies on a well-insulated tank and a sensible heating schedule rather than firing on demand. A gas unit is simpler and faster, but combustion loses heat up the flue and the burner keeps relighting to top up a tank that bleeds standing heat around the clock — losses a heat pump replaces at a third or less of the energy cost.

Running costs compared

This is where the decision usually gets made. As the table above shows, the gap between these systems is large and consistent over a year.

For a typical household of four, you're looking at estimated annual hot-water running costs of:

• Electric storage: $1,200–$1,500
• Gas storage: $400–$600
• Heat pump: $300–$400
• Heat pump on solar: $50–$100

Those are estimates, not quotes — your actual figure depends on your tariff, how much hot water your household uses, local climate and the specific unit. But the pattern holds. An old electric resistive tank is by far the most expensive thing in this comparison, often costing three to four times what a heat pump costs to run.

Gas sits in the middle. It's much cheaper to run than electric storage, which is exactly why so many Victorian homes have a gas unit today. But against a heat pump, gas still costs noticeably more to run each year — and that comparison gets sharper once you add the supply charge, which we'll come to next.

The standout line is the heat pump paired with rooftop solar. A unit only needs a few hours to reheat a tank, and a well-insulated tank holds that heat overnight, so setting a timer to run it during the middle of the day banks water heated with electricity you'd otherwise export for a few cents — the same machine simply scheduled differently. That's how the annual running cost drops to an estimated $50–$100; the pitfall is leaving it on a controlled overnight tariff out of habit, which throws that cheap energy away. If you already have solar, a heat pump is close to a no-brainer on running cost alone. For a deeper breakdown, see our heat pump hot water cost guide and the tariff detail in the real cost of hot water guide.

Why the heat pump wins twice

People focus on the headline running-cost numbers, but there are really two separate savings when you move from gas to a heat pump.

The first is efficiency. A heat pump's COP of three to four means it does the same heating job for a fraction of the energy input. Even at electricity prices well above gas prices per unit, that three-to-one-plus advantage in efficiency more than closes the gap. Run it on solar and the comparison stops being close at all.

The second saving is the one people forget: the daily gas supply charge. If your hot water is the only gas appliance in your home — or the last one — then disconnecting from gas removes that fixed daily charge entirely. You pay it every single day regardless of how little gas you burn, so for a low-gas-use household it can be a meaningful chunk of the bill. Replacing a gas hot water unit with a heat pump and going fully electric means that charge disappears from your account. That's a saving the running-cost table can't fully capture, because it's a fixed cost rather than a usage cost.

Put those two together and the case is straightforward: the heat pump beats gas on the energy it uses and lets you cut a fixed cost you'd otherwise keep paying.

Upfront cost and Victorian rebates

The catch, of course, is the sticker price. A heat pump costs more to buy and install than a like-for-like gas or electric unit. Before rebates, installed costs are roughly:

• Entry-level: $2,200–$2,800
• Mid-range: $2,800–$4,000
• Premium CO₂ split systems: $5,000–$6,000

Again, treat these as estimates — the right figure depends on your site, the brand, tank size and whether any plumbing or electrical work is needed. The good news for Victorians is that several rebates stack on top of each other and can take a serious bite out of that upfront number.

The rebates you can stack in Victoria

There are three main programs working together in 2026:

• Victorian Energy Upgrades (VEU): A point-of-sale discount applied by an accredited provider. The amount varies, but it's commonly worth up to around $1,000 off the installed price.
• Solar Victoria hot water rebate: Worth up to $1,000 — or up to $1,400 for an eligible Australian-made system. It's calculated as 50% of the price after the other discounts have been applied, so the order of operations matters.
• Federal Small-scale Technology Certificates (STCs): The Commonwealth scheme contributes roughly $400 in value, usually assigned to the installer in exchange for an upfront discount.

Stacked together, these can knock up to around $2,600 off the upfront cost. On a mid-range system that can mean paying a fraction of the headline price out of pocket.

A couple of important conditions apply. The Solar Victoria rebate has an income eligibility test, and the household income threshold drops from $210,000 to $150,000 on 1 July 2026 — so if you're near that line, the timing of your application could matter. Eligibility rules, rebate amounts and Australian-made bonuses also change from time to time. Always confirm the current rebate figures and eligibility criteria with the issuing authority before you commit, because the numbers above are indicative only. For the full picture, read our heat pump rebates guide and the live figures on heat pump rebates in Victoria.

What installation actually involves

Switching from gas to a heat pump is more involved than a like-for-like gas swap, and knowing the steps helps you read a quote. After the old unit comes out, most homes use an integrated unit (tank and compressor in one cabinet) roughly where the old tank stood, provided there's airflow, while a CO₂ split system puts the compressor outside — dearer to fit but quieter and better in the cold. The plumber connects the cold feed, hot outlet, relief valve and a condensate drain (a heat pump produces a little water as it works), and because it needs a dedicated circuit an electrician may add a breaker or run a new cable. None of this is exotic, but it's real labour — which is why a "fully installed" price matters so much when you compare quotes.

If hot water is your last gas appliance, going fully electric also means disconnecting from the gas network, which is what removes the daily supply charge. Capping the supply at the meter is cheaper and reversible; abolishment removes the meter and service line for a clean break — which one actually ends the charge can depend on your retailer and distributor, and there's sometimes a one-off abolishment fee, so confirm first. Crucially, disconnecting the appliance isn't the same as ending billing: the charge keeps accruing until you formally close the gas account.

A realistic look at payback

Payback is where the upfront cost and the running-cost savings meet. The question is simple: how long before the money you save each year repays the extra you spent up front?

Once rebates are factored in, the payback on a heat pump compared with continuing to run an old electric or gas system is commonly 3–6 years. After that, the running-cost savings are money in your pocket, and a quality heat pump should keep running well beyond the payback period.

Where you land in that 3–6 year range depends heavily on what you're replacing and whether you have solar:

• Replacing an old electric storage unit: This is the fastest payback. You're swapping a $1,200–$1,500-a-year running cost for $300–$400 (or less with solar), so the annual saving is large and the payback is at the short end.
• Replacing a gas unit: Slower, because gas was already cheaper to run than electric. But once you add the removed gas supply charge — especially if hot water was your last gas appliance — the case improves considerably.
• Pairing with solar: A heat pump running on daytime solar has the strongest payback of all, because the running cost falls to almost nothing.

To put your own numbers into it rather than relying on a range, you can estimate your savings with our calculator, which lets you plug in your current system and usage.

A worked comparison over ten years

Payback tells you when you break even; the ten-year view tells you what you keep. Using only the running-cost ranges from the table above, an old electric storage tank at $1,200–$1,500 a year spends roughly $12,000–$15,000 over a decade just making hot water. A gas storage unit at $400–$600 lands around $4,000–$6,000 — before the daily supply charge on top. A heat pump at $300–$400 totals about $3,000–$4,000, and a heat pump on solar at $50–$100 only about $500–$1,000. So against electric storage a heat pump saves something like $8,000–$12,000 over ten years, more again on solar — far more than the out-of-pocket price after the Victorian rebate stack. Against gas it's tighter, but the heat pump still comes out ahead each year and the avoided supply charge stretches that lead further. These are estimates built on ranges, not a quote, but the direction is unambiguous.

When it's worth switching — and when it isn't

A heat pump is the cheapest system to run, but that doesn't mean today is automatically the right day to install one. Here's an honest take.

When it makes sense

• Your hot water system is failing or already dead. If you need a new unit anyway, a heat pump is almost always the smart replacement on a total-cost-of-ownership basis. You're spending the money regardless, so spend it on the cheapest-to-run option.
• You're running an old electric storage tank. The running-cost gap is so large that the switch typically pays for itself quickly.
• You have rooftop solar, or you're about to. Daytime solar turns a heat pump's running cost into pocket change.
• Hot water is your last (or only) gas appliance. Disconnecting from gas removes the daily supply charge, sharpening the savings and simplifying your bills.
• You qualify for the rebate stack. The up-to-$2,600 in combined rebates dramatically shortens payback — and the income threshold tightening on 1 July 2026 is a reason not to leave it too long if you're close to the limit.

When it doesn't (yet)

• You have a near-new gas hot water unit. Don't rip out a healthy, recently installed gas system just to chase running-cost savings. The payback maths assumes you're replacing something at or near the end of its life. Scrapping a unit with years of service left in it wastes the value you've already paid for. Wait until it needs replacing, then go heat pump.
• You still rely on gas for cooking and heating. If you're keeping gas for other appliances, you'll keep paying the supply charge regardless, so switching hot water alone removes one of the two heat-pump savings. The case is still positive on running cost, just less dramatic.
• Your site is genuinely unsuitable. Heat pumps need airflow and a sensible spot for the unit, and the compressor makes some noise. Most homes are fine, but a cramped apartment courtyard or a bedroom-adjacent wall can be a problem worth solving before you buy.

The all-electric context

Victoria has been steadily steering homes away from gas, and hot water is usually the easiest and most cost-effective appliance to electrify first. It's a self-contained swap that doesn't disrupt your kitchen or your heating, and it's the single biggest gas-bill line item in many homes. If your longer-term plan is to go all-electric — pairing a heat pump with reverse-cycle heating and an induction cooktop down the track — then electrifying hot water is the natural first step, and it's the one with the clearest payback. You don't have to do it all at once; doing hot water first banks the savings while you plan the rest.

What to look for in a quote

When you're comparing quotes, the cheapest headline number isn't always the best deal. A few things to check:

• Is it fully installed? Make sure the price includes removal and disposal of the old unit, all plumbing and any electrical work — not just the box on a pallet.
• Are the rebates already applied? A good Victorian installer should be VEU-accredited and able to apply the point-of-sale discount and assign your STCs, then show you the net price after rebates. Ask for the price before and after rebates so you can see what's been included.
• What's the COP and tank size? A higher COP means lower running costs; the right tank size means you won't run out of hot water. Match the tank to your household, not to the cheapest option.
• Is it suited to your climate? A heat pump still works well below freezing, though its COP eases toward the lower end of the three-to-five range on the coldest mornings. For genuinely cold pockets, ask whether it's rated for low ambient temperatures; CO₂ split systems hold their cold-weather efficiency better but cost more.
• Australian-made eligibility. If you're chasing the higher Solar Victoria rebate, confirm the specific model qualifies for the Australian-made bonus before you sign.
• Warranty, lifespan and servicing. A quality heat pump should last well beyond its 3–6 year payback, so its back end is largely savings — but the compressor sets the ceiling on longevity, so check its warranty as well as the tank's, and confirm local servicing support. Upkeep is light: keep the air intake clear and have the relief valve and anode checked periodically.

It's worth getting a few quotes so you can compare net prices, not just brands. To see which systems reviewers and installers rate, read up on the best heat pump systems, and when you're ready to compare real installed prices, you can get free quotes from local Victorian installers.

The bottom line

On running cost, a heat pump beats both gas and electric storage — it uses a fraction of the energy thanks to its COP, and switching off gas sheds the daily supply charge on top. Upfront it costs more, but the Victorian rebate stack can take up to around $2,600 off the price, bringing payback down to a common 3–6 years. The smartest move is to switch when your existing unit is at the end of its life, prioritise it if you have solar, and resist replacing a near-new gas system just for the savings. Run the figures for your own household, confirm the current rebates with the issuing authority, and get a few fully installed quotes before you decide.