For most Australian households replacing an old electric or gas hot water system, a heat pump is the easier choice: it needs no roof area, works in most climates, and earns federal STCs plus, in Victoria, VEECs on eligible jobs. Solar hot water remains a strong option where there is good sun, a suitable roof and a household that uses a lot of hot water, particularly when paired with a gas or electric booster that rarely has to run.
Both are eligible for incentives, both reduce energy use, and the right answer depends on your climate, roof, household size, existing system and what you are replacing. This guide lays out how each works, where each suits, the incentive position at the time of writing and a simple decision path. For the mechanics of the federal incentive itself, see heat pump hot water STCs explained.
How each one works
Heat pump. An air-source heat pump moves heat from the surrounding air into the water using a compressor, a bit like a refrigerator in reverse. It uses electricity, but far less than a resistance element heating the same water, because it moves heat rather than creating it. Most home units are integrated (tank and heat pump together) or split.
Solar hot water. Collectors on the roof heat water or a fluid that passes heat to a tank. A booster, electric or gas, tops up the water when the sun is not enough. Systems are either close-coupled (tank on the roof) or split (tank at ground level with a pump).
Where each suits
| Factor | Heat pump | Solar hot water |
|---|---|---|
| Roof needed | No | Yes, north-facing, unshaded space |
| Cold climates | Works, with lower efficiency in deep cold; check the model’s rating | Needs a good booster for low-sun periods |
| High sun climates | Very efficient | Excellent |
| Large households | Sized tank and recovery rate matter | Collector area and tank size matter |
| Space | Needs room and airflow for the unit; noise near bedrooms | Roof loads and tank location |
| Pairing with rooftop solar PV | Good: run on your own power by day | Competes with PV for roof space |
| Replacement ease | Often swaps for an existing electric tank | Plumbing and roof work |
If you already have rooftop solar PV or plan to install it, a heat pump that heats during the day uses your own generation. If you have no PV and a sunny, uncluttered roof, solar hot water can be efficient. Rental or strata properties may constrain roof work.
Incentives in 2026
STCs. Eligible heat pump and solar hot water systems can create small-scale technology certificates. The number depends on the model, the tank size and your hot water zone, and it has to be on the Clean Energy Regulator’s list of eligible products. The installer typically creates the certificates, sells them and credits the value on the quote. See our answer on how many STCs a heat pump earns and the hot water checklist.
VEECs in Victoria. Victorian Energy Upgrades has had activities for replacing old water heaters with efficient ones, and a qualifying job creates VEECs through an accredited provider. Details and eligible products are on the Essential Services Commission site. See VEECs and STCs on the same job.
Solar Victoria. The state’s hot water rebate has been income-tested, with the household income cap falling to $150,000 on 1 July 2026, and amounts that have been up to about $1,000 or $1,400 for Australian-made products. Check the current page. See the income limit answer.
NSW. Energy Savings Scheme certificates can apply to some hot water upgrades. See the NSW heat pump rebate answer.
Amounts differ by product and over time. Always ask the installer to show each incentive on the quote.
Running costs in practice
Rather than quote tariff-dependent dollar figures, use a method. Take your annual hot water energy use (from your bill or from the old system’s rating), then compare the new system’s rated annual consumption on its product sheet. Multiply the difference by your tariff.
A worked pattern: if an old electric storage heater uses 4,000 kWh a year, a heat pump that cuts consumption by roughly two thirds saves around 2,700 kWh. At 30 cents a kWh that is about $800 a year. Your actual numbers will differ, but the method holds. For solar hot water, the saving depends on the booster energy that remains after the sun’s contribution.
Decision guide
- Do you have a sunny, unshaded roof and no PV plans? Look hard at solar hot water.
- Do you have or plan PV? A heat pump pairs well.
- Is your climate very cold? Check the heat pump’s rated performance at low temperatures and consider a model designed for cold climates.
- Is space or noise an issue? Heat pumps need airflow and can be audible.
- What are you replacing? A gas system may involve disconnection and new electrical work. An old electric tank is often the simplest swap.
- Which incentives apply in your state? Compare the net price after STCs, VEECs and any state rebate.
Replacement realities people miss
Three practical points decide more installs than the technology does. First, the existing connection: a heat pump that replaces an electric storage tank usually reuses the electrical circuit, while swapping from gas needs new electrical work and capping the gas line, which can add cost. Second, the delivery of hot water: some households on off-peak or controlled-load tariffs need the heat pump set to run in the right window, or the tank may not recover when it is needed. Third, the warranty: tank and compressor warranties are often different lengths, and some manufacturers require installation by an approved installer to keep them valid. Ask which parts are covered for how long.
For a household with rooftop solar, ask whether the installer will program the heat pump to run in the middle of the day. It is a free saving that many installations leave unused.
What it means for installers
Both products are eligible, but their paperwork differs. Evidence includes the model, serial number, tank details and photos of the installation. Installers who handle both should keep separate checklists. See installation type guidance for how replacement and new installs are treated, and the hot water STC pillar.
What to do next
- Decide on climate and roof fit using the table.
- Get two quotes showing model, STC count, any VEECs or state rebate, and net price.
- Confirm product eligibility on the regulator’s list.
- Installers: see how it works and pricing for settlement on hot water claims.