Your hot water system is not something most people think about until it stops working. But if you are replacing one, or building and choosing for the first time, the decision between a heat pump and an instantaneous gas system is worth getting right. Get it wrong and you are locked into a higher energy bill for the next 10 to 15 years.
Both systems work in the Southern Highlands. The climate question people worry about most, whether a heat pump can handle Highlands winters, has a straightforward answer: yes, if you choose the right model. The real differences come down to running costs, upfront price, how your home is set up, and how much hot water you actually use.
Here is an honest breakdown of both, from a team that installs them in this region every week.
How Each System Heats Your Water
The technology behind each system is very different, and understanding it makes the cost comparison much easier to follow.
Heat pump hot water
A heat pump does not generate heat directly. It pulls warmth from the surrounding air and transfers it into a storage tank, the same principle as a reverse-cycle air conditioner. Because it moves heat rather than creates it, you get three to four units of heating output for every one unit of electricity you put in.
- Needs a storage tank (typically 250 to 315 litres for a family home)
- Runs on electricity: no gas connection required
- Can be scheduled to run during off-peak hours or on excess solar
- Takes longer to recover if the tank is fully depleted during heavy use
Instantaneous gas hot water
An instantaneous gas hot water system, also called a continuous flow system, heats water on demand as it passes through a heat exchanger. The burner fires when you open a tap and switches off when you close it. No storage tank, no standby heat loss.
- Unlimited hot water for as long as gas is flowing
- Compact wall-mounted unit: no tank footprint
- Requires a gas connection (natural gas or LPG)
- Running cost tied entirely to your gas tariff and usage volume
Running Costs: The Numbers That Actually Matter
This is where the two systems separate clearly. Based on Sustainability Victoria modelling from mid-2024 using standard Australian tariffs:
| Household size | Heat pump (peak tariff) | Instantaneous gas (natural gas) |
|---|---|---|
| 1 person (50 L/day) | approx. $205/yr | approx. $235/yr |
| 2 people (90 L/day) | approx. $295/yr | approx. $350/yr |
| 4 people (150 L/day) | approx. $500/yr | approx. $650/yr |
A few things worth knowing about those figures:
- They use standard peak electricity and natural gas tariffs. Scheduling the heat pump to run off-peak or on solar brings costs down further.
- Homes on LPG pay significantly more per megajoule than homes on reticulated natural gas. If you are on LPG, the gap in favour of the heat pump widens considerably.
- Gas prices in NSW have trended upward over recent years, and that affects the gas running cost more than the electricity cost of a heat pump.
If you want to compare the lifespan of hot water systems, our guide on how long a hot water system lasts is worth considering.
| Quick Answer: Heat pumps cost roughly 30 to 45% less to run than instantaneous natural gas for most households. On LPG, the saving is larger still. A heat pump that costs $2,500 more upfront but saves $350 per year on energy pays back the difference in around seven years. The system then runs for another five to eight years after that. |
Cold-Weather Performance in the Highlands
Bowral sits at around 690 metres elevation. June, July, and August bring frosts and the occasional sub-zero morning. It is the most common concern we hear when homeowners consider switching to a heat pump.
Heat pump in cold conditions
Modern heat pumps are built for this. Most Australian-market units operate down to around 0°C, and cold-climate models rated to minus 7°C or lower are available and specifically suited to the Highlands.
- Below about 5°C, the unit works harder and draws more electricity. Some models also activate a backup electric element.
- On the coldest nights, efficiency drops, but only for a portion of the year. Across all twelve months, heat pumps in this region still run cheaper than gas.
- The key is choosing a model rated for the climate. Not every heat pump on the market is appropriate for Highlands winters, and we factor this in when recommending a system.
| Installer tip: For Highlands homes, we recommend a minimum operating temperature rating of minus 7°C and a tank of at least 250 litres. The larger buffer means you have hot water reserves on cold nights when recovery is slower. Ask us about hot water installation and repair and which systems we recommend for this area. |
Instantaneous gas in cold conditions
No cold-weather limitations. The burner fires at any temperature, and output is consistent whether it is 30°C or minus 2°C outside. If unlimited simultaneous hot water across multiple outlets is a priority, this is where gas has a clear practical advantage.
Upfront and Installation Costs
The upfront cost difference is real and worth factoring into the decision, but there are a few things that change the picture.
| Heat pump | Instantaneous gas | |
|---|---|---|
| Typical installed cost (NSW) | $3,500 to $7,000 | $1,500 to $3,000 |
| Government incentives | Yes, ask us for current details | Not typically |
| Extra infrastructure | May need electrical circuit upgrade | Gas connection if not already in place |
| Net cost after incentives | Often meaningfully lower | $1,500 to $3,000 |
A few things that affect the hot water installation cost:
- Like-for-like replacements (gas for gas, heat pump for heat pump) are the most straightforward and usually the quickest.
- Switching from gas to heat pump may require a new electrical circuit, which adds to the job. We assess this at quote.
- Heat pump tank footprint (roughly 550mm wide and 1.7m tall) needs to be considered. It can go outdoors or in a well-ventilated indoor space.
- No gas connection in place? Running a new gas line adds significantly to the cost of any gas system.
Which System Is Right for Your Home?
There is no single answer, but the following should make the decision clearer.
A heat pump is likely the better fit if:
- Your home runs on electricity, or you want to move away from gas
- You have rooftop solar and want to use excess generation to heat water
- You are on LPG rather than reticulated natural gas
- You plan to stay in the home for seven or more years
- Reducing your running costs and emissions long-term is the priority
Instantaneous gas may suit you better if:
- Your home has a solid natural gas connection and your budget for upfront cost is tight
- You need unlimited simultaneous hot water across multiple bathrooms
- You are doing a straight swap for an existing continuous flow gas unit
- You do not have space or the right electrical setup for a heat pump tank
| Our view: For most Highlands homes we work in, especially those with solar or planning a long-term stay, the heat pump delivers better value over its lifetime. Instantaneous gas remains a good option in the right situation, and when gas is the right call, we install Rinnai continuous flow systems. |
A Note on Gas in the Highlands
Reticulated natural gas is available across the main towns, including Bowral, Mittagong, and Moss Vale. But many properties outside these centres, including rural blocks and newer estates in areas like Exeter, Robertson, and Bundanoon, run on LPG bottles rather than a mains gas connection.
If you are unsure which fuel your current system uses, it is worth checking before comparing costs. LPG is significantly more expensive per unit of energy than natural gas, and it changes the financial comparison considerably in the heat pump’s favour.
Side by Side: Heat Pump vs Instantaneous Gas
| Feature | Heat pump | Instantaneous gas |
|---|---|---|
| How it works | Extracts heat from air into storage tank | Burns gas on demand, no storage tank |
| Running cost (4-person) | approx. $450 to $550/yr | approx. $600 to $700/yr (natural gas) |
| LPG running cost | Same as above | Significantly higher |
| Upfront cost (NSW) | $3,500 to $7,000 before incentives | $1,500 to $3,000 |
| Hot water supply | Storage tank (250 to 315 L) | Unlimited, continuous |
| Cold-weather performance | Good; cold-rated models recommended here | Excellent, unaffected by temperature |
| Solar PV compatible | Yes, can run on excess solar | No |
| Greenhouse emissions | Lower | Higher |
| Space needed | Outdoor or ventilated indoor space for tank | Compact wall-mounted unit |
| System lifespan | 10 to 15 years | 10 to 15 years |
| Best suited for | Solar homes; LPG homes; long-term owners | Gas-connected homes; multi-bathroom demand |
Common Questions
Will a heat pump run out of hot water?
It can if demand exceeds tank capacity before the system reheats. A 250 to 315 litre tank is generally right for a four-person home. If your household has high peak demand, we can advise on sizing when we visit.
Can I put a heat pump tank indoors?
Yes, in a well-ventilated space such as a garage or utility room. The unit draws in air to extract heat, so it needs airflow and the room needs to handle the cooler air it exhausts. Outdoors are often simpler.
Do I need to cap my gas pipes if I switch to a heat pump?
The gas supply to your hot water system would be decommissioned, but there is no requirement to remove the pipework. Some homeowners use the opportunity to review their full gas setup, but it is not mandatory.
What heat pump brands do you install?
We install Daikin as our preferred heat pump brand, alongside Reclaim Energy.. For instantaneous gas, we install Rinnai. We recommend it based on your home’s specific needs and budget.
Are there government incentives for heat pumps in NSW?
Yes, there are currently incentives available for eligible households in NSW. The amounts vary depending on the system and your existing setup. Ask us when you get a quote and we will confirm what applies at the time.