Every figure below comes from the same data that runs redo.energy's commercial planner: each utility's 2024 commercial electricity rate and each state's 2025 commercial gas price, both from the U.S. Energy Information Administration (EIA), and the planner's own hot water model. Where an industry design guide supplies a number instead, it's linked.
A restaurant uses five to seven times more energy per square foot than an office or a store, and a busy counter-service place can hit ten. Almost none of the advice written for homeowners survives that. A house's biggest load is space heat. A full-service restaurant's is food preparation, at about 35 percent of the energy bill, then heating and cooling at 28 percent, then sanitation, which mostly means hot water, at 18 percent, then lighting at 13 and refrigeration at 6. A home's peak energy demand is during a cold morning. A restaurant's is dinner, after the sun has gone down.
That's two posts' worth of difference. This one is about the water heater, the one line on that list a restaurant can move this year without touching the range or asking the landlord. The next post is about everything that happens after dark: demand charges, the dinner peak, the roof, and batteries.
Let's take two different kinds of restaurants, because they'll give different answers. The first has a 120-seat dining room: 5,000 square feet, does dinner six nights a week, a gas line under the range, a gas water heater feeding a 180°F dish washer, and a peak draw around 35 kilowatts (kW) (our commercial solar calculator's default for a restaurant). The second is a counter-service shop: 2,500 square feet in a strip mall, lunch and dinner seven days, a lease, a landlord who owns the roof, and an electric water heater in a closet because the plaza never ran gas to that unit.
Budget in hot water? Check your water heater
Hot water can be up to a third of a restaurant's energy use, according to the food-service design guide the California Energy Commission funded, and most of it goes down the drain in the dish room. A conventional counter-service kitchen uses about 500 gallons of hot water a day; a full-service one about 2,000. Gas storage water heaters run at 80 percent efficiency (or worse) and last about five years in a kitchen.
A heat pump water heater makes the same hot water by pulling heat out of the air around it, at a coefficient of performance (COP) of 2 to 4 for a split system, meaning two to four units of heat per unit of electricity. Whether that beats your current heater depends entirely on what the current heater burns.
If it's electric, the heat pump wins everywhere we checked. For the counter-service shop in Massachusetts, on National Grid, our planner puts the load at 300 gallons a day and 18,700 kilowatt-hours (kWh) of heat a year. A resistance heater buys all of that at National Grid's business rate, 23 cents. A heat pump at a COP of 3 buys a third of it. That's $2,871 a year saved, on an installed cost the planner prices at $30,600 for a split system, or about $23,000 after this year's 100 percent bonus depreciation at a 25 percent tax rate, and before Mass Save's $1,000 to $2,200 per unit. Payback lands in eight years, on a machine that will outlive the heater it replaces. Around Boston, Eversource charges businesses 27 cents, so the same swap saves $3,370 a year and pays back in seven. In Georgia, where electricity is cheap enough that resistance heating hurts less, it saves $1,448 a year on Georgia Power and pays back in about fourteen.
If it's gas, it's close, and your utility and where the unit sits decide it. Gas delivers heat cheaply. In Massachusetts, at $1.70 a therm through an 80 percent efficient heater, a unit of hot water costs about 7.3 cents; a heat pump at a COP of 3 on National Grid's 23-cent electricity costs 7.7 cents. The dining room's 31,000 kWh of hot water a year comes to $2,263 on gas and $2,393 on the heat pump. Break-even is a COP of about 3.2 on National Grid and 3.7 on Eversource around Boston, 3.7 at Xcel Energy in Minnesota, 2.8 at Georgia Power and Nashville Electric Service, and 2.0 at Seattle City Light. Within a state it can swing a long way: 3.4 at Southern California Edison against 5.8 at PG&E, and 2.2 on National Grid in upstate New York against 6.0 at Con Edison. Rated hybrid units claim 4.0 and operate between 1.5 and 3.0 once recirculation losses are counted. So on the standard install, a gas-heated dining room in most of the Northeast should keep its gas heater until it dies.
The one lever a restaurant has that a house doesn't is the air. A heat pump water heater's efficiency rises with the temperature of the air at its coil, and a kitchen is the hottest room in the building. The California guide's most compact all-electric layout hangs two small split-system heat pump modules, the compressor-and-coil boxes with no tank in them, high on a kitchen wall in the warm air near the ceiling, with the storage tanks on the floor, and models an operating COP of 4.3 for them. That clears break-even across Massachusetts and at most utilities we track. It doesn't where electricity is expensive next to gas, including Connecticut, Vermont, much of Ohio, and the territories of PG&E, SDG&E, Con Edison, and the Long Island Power Authority. It's a modeled number, not a measured one; the field studies are running now and haven't reported. The same guide's cost verdict went to a plainer layout, three floor-standing hybrid units at a COP of 2.5, because the wall-mounted scenario still needed a 30-kilowatt resistance heater to hold the recirculation loop hot. Placement is a real lever. It isn't a free one.
Nothing goes in the ceiling, and nothing goes over the line. The tank stays on the floor; what mounts high is a box about the size of a mini-split's outdoor unit. It belongs over the dish room or the prep area, not the cook line, because grease in the air fouls an evaporator coil the way it fouls a hood filter, and the coil needs a washable filter and a cleaning schedule either way. It makes condensate, which needs a drain, and no health inspector will pass a drip line over a prep table. And it's loud enough to notice in a small kitchen: Rheem rates its commercial units at 54 to 62 decibels at ten feet depending on size, and its installation manual warns of up to 69.
Propane refrigerant is mostly a non-issue here. The UL safety standard caps the charge at 114 grams no matter where the unit sits, and charge is what sets how much heat a refrigerant circuit can move, so the cap shrinks the machine rather than just relocating it. Oak Ridge National Laboratory needed about 340 grams to make an ordinary 50-gallon residential unit work. The international standard allows 988 grams in a sealed unit and nearly five kilograms in an outdoor air-to-water machine, which is why propane water heaters are ordinary in Europe and absent here.
What you will actually be offered runs on R-134a, on its lower-warming replacement R-513A, or on CO2. Rheem's commercial unit and A.O. Smith's packaged one are R-134a. Lochinvar's Veritus line and A.O. Smith's Emerge X have moved to R-513A. The CO2 machines, Lync's Aegis and Mitsubishi's Heat2O among them, are the ones that will make 176-degree water and still run at 13 below. None of it is a choice you make: the refrigerant arrives with the machine that fits the hot water problem. What it changes for you is the plumbing. A CO2 unit only stays efficient if the water returning to it is cold, so it wants a tall stratified tank and a separate loop to hold the recirculation hot. That said, the upside is real too. It cools the room as it works, which San Francisco's health department lists as a reason to approve one.
How much cooling? The heat has to come from somewhere, so the cooling is just the hot water delivered minus the electricity used to move it. For the shop's 18,700 kWh at a COP of 3 that is about 12,500 kWh a year, 42 million BTU, or four tenths of a ton of cooling running around the clock; the dining room gets about two thirds of a ton. If all of it displaced air conditioning at 23-cent power it would be worth roughly $800 a year to the shop and $1,400 to the dining room.
Don't budget that. The careful measurements are all residential and they are sobering. Pacific Northwest National Laboratory's paired test houses found the HVAC system made up only about 40 percent of the heat the water heater pulled out of the closet, and a Florida field study put the median cooling saving at $49 a year, a third of it eaten back by the winter heating penalty. A kitchen is the better case, because it wants cooling in January too, and the only restaurant measurement we found, two Los Angeles sites monitored for the California Energy Commission, got 14 percent off the air conditioning. But that machine was a gas absorption unit plumbed into a chilled water loop built to harvest the cooling, not a box breathing on the dish pit. Budget a few hundred dollars a year and a cooler dish room, and treat anything past that as a bonus.
That department's January 2025 bulletin also draws the line between the two restaurants for us. California's health-code sizing rule counts a water heater's resistance input, not the heat a heat pump delivers, so a hybrid unit qualifies on its elements alone while a heat-pump-only system has to be oversized three or four times to pass. The bulletin says hybrid units "will work best for smaller establishments with limited hot water needs such as ice cream shops, coffee bars, or quick-service sandwich shops," and points larger kitchens to the split, heat-pump-assisted layouts in the design guide. The shop bolts in a hybrid unit. The dining room designs a system. And from 2027 on the Bay Area's air district will stop the sale and installation of new gas tank water heaters up to 75,000 British thermal units (BTU) an hour, so a Bay Area dining room's next water heater may not be allowed to be gas whether or not the running cost favors it.
For the dining room, then: replace the gas water heater with a heat pump when the old one fails, put the heat pump module where the air is warm and the grease isn't, size it to carry the base and let a booster handle the peak.
For the counter-service shop, the answer depends on what's in the closet. On electric, as ours is, replace it now on one of Mass Save's offers. It's the most expensive hot water in the building, the savings are the $2,871 from earlier, and it's the tenant's equipment, so the landlord's only part is one signature on the 100 percent offer. On gas, the shop follows the dining room's rule and waits for the heater to fail, but it buys a hybrid unit off the shelf rather than designing a split system, because the sizing rule and its smaller load both point there.
Propane costs more per unit of heat than gas in every state we track, so a propane water heater loses to the heat pump wherever a gas one would be close.
The water heater is the tenant's, and so is the rebate
Most counter-service restaurants rent, five years at a time. The roof, the rooftop units, and the service entrance belong to the landlord. The water heater, the kitchen equipment, the walk-in, and the lighting usually belong to the tenant. That list holds most of the energy savings available in a restaurant, so the tenant controls the upgrades that matter.
Massachusetts runs the clearest tenant program we've found. A renter using under 1.5 million kWh or 40,000 therms a year who pays the energy bills and occupies more than half the building can have up to 100 percent of eligible upgrades paid for, with the landlord signing one qualification form. The general small business offer pays up to 70 percent and covers water heating equipment along with heat pumps, refrigeration controls, and weatherization. The test for anything the tenant pays for themselves is a payback shorter than the remaining lease. On its own, at eight years, the shop's water heater fails that test on a five-year term. It passes on either offer: at 70 percent, the shop's share pays back in under three years.
Outside Massachusetts, two lines are worth a call. Your utility's commercial water heating rebate, which is usually a flat amount per unit like Mass Save's. And, for a restaurant outside a town of 50,000, the Rural Energy for America Program (REAP), which pays grants of up to half of an efficiency project's cost. That half came from the 2022 climate law's funding; the statutory baseline without it is 25 percent. The grant window is shut at the moment. USDA paused new grant applications in June 2025 to work through a backlog, and says it will rewrite the program rules before reopening them, though guaranteed loans are still being made. Have the paperwork ready for the day it reopens.
Gas doesn't leave the bill when the burners stay
A dining room with a gas line keeps a gas account, and a gas account carries a customer charge whether or not a therm is burned. On Xcel Energy's Minnesota commercial tariff it's $25 a month for a small customer and $50 for a large one, against $9 for a house. Move the space heat and the water heater to heat pumps and the range still costs $300 to $600 a year before it cooks anything. That's the normal case for a dining room, and it's the opposite of the residential math, where full conversion closes the account.
The shop can close it. A counter-service kitchen with electric fryers and griddles has no gas line to keep, and a plaza unit that never had one is already there. For the shop, electrification finishes; for the dining room, it stops at the range.
Where you are changes the answer
The water heater question turns on one ratio: what your electricity costs versus what your gas costs, if you have gas at all.
Massachusetts and New York. Against $1.70 gas, National Grid's 23-cent business electricity puts break-even at a COP of 3.2 in Massachusetts, and Eversource's 27 cents around Boston puts it at 3.7. New York's gas is cheaper, and its utilities are far apart: break-even is 2.2 on National Grid upstate and 6.0 at Con Edison. The shop replaces its electric heater now, on the 100 percent tenant offer if it qualifies. The dining room keeps its gas heater until it dies, then puts the heat pump module where the kitchen air is warm. In Massachusetts that clears the line, and upstate New York clears it easily. At Con Edison and on Long Island nothing does yet, so a downstate dining room is buying a cooler kitchen and a cleaner one, not a lower bill.
California. Gas is $1.61 a therm, and business electricity costs 23 cents at Southern California Edison, 36 at SDG&E, and 40 at PG&E. At Southern California Edison break-even is 3.4, above what a hybrid unit delivers in the field and under the guide's kitchen-mounted 4.3, which beats gas there by about 22 percent, $1,677 a year against $2,144 for the dining room. At PG&E break-even is 5.8 and at SDG&E 5.2, so even the kitchen-mounted unit costs more to run than gas: $2,867 a year at PG&E. What decides it is the calendar. From 2027 the Bay Area stops the sale of new gas tank water heaters up to 75,000 BTU an hour, Southern California's air district is phasing in similar rules, and the state is drafting a statewide standard. The shop bolts in a hybrid unit the health department already knows how to approve. The dining room designs its split system now, while it can still choose the timing.
The Southeast and Tennessee. Cheap electricity brings the heat pump level with gas. Against gas, break-even is 2.8 at Nashville Electric Service and 2.7 at Alabama Power, under the COP of 3 our planner assumes, so on gas the heat pump wins narrowly at both. Against resistance it saves less than in the Northeast, $1,448 a year for the shop on Georgia Power and about fourteen years to pay back, because resistance was cheap too.
The Pacific Northwest. Break-even is 2.0 at Seattle City Light and 2.7 at Portland General Electric, and under 3 everywhere in both states. Hydro power is cheap and gas isn't. The heat pump wins against everything.
The Midwest. Gas at 82 cents a therm in Minnesota puts break-even at 3.7 at Xcel Energy. The heat pump wins outright against electric or propane. A dining room on gas keeps its heater until it dies, then mounts the module where the kitchen air is warm, which clears 3.7.
Northern New England. Many restaurants there heat water with propane or oil rather than pipeline gas, and both cost more per unit of heat than gas anywhere, so the heat pump wins at either restaurant. Efficiency Vermont and Efficiency Maine run the programs.
Rural, anywhere. REAP first, whenever the grant window reopens. Our calculators don't count the grant, so take it off the quoted cost yourself.
Some honest caveats before you call anyone
Our planner assumes a COP of 3 and a closet, and 100 gallons of hot water per 1,000 square feet; a place that turns 750 covers a night uses more, and the savings scale with it. The 4.3 for a kitchen-mounted unit is a modeled figure until the field studies report. Health-department sizing rules differ by state, and California's is the only one we've read, so ask yours before you buy anything.
The water heater is the decision a restaurant can make alone. The rest of the bill, the demand charge, the dinner peak, the roof, and the battery, runs through the utility and the landlord, and the two restaurants part ways again there. Part 2 picks up that bill: how a ratchet makes a winter heat pump close to free on the demand line, why a restaurant's peak lands after the sun goes down, what a battery sized to the demand peak is worth in each region, and which half of all this belongs to the landlord.
Our commercial planner takes a restaurant as a building type, with the hot water load, your utility's rates, and your state's incentives already loaded. Run your address before you sign a quote.