Smart Water Heaters & Demand Flexibility: What Utilities Should Know Before Launching a Program

Water heaters are quietly becoming one of the most valuable tools in a utility’s demand flexibility toolkit. Because they store energy as hot water rather than using it instantly, a smart water heater can shift or curtail electricity use for hours without customers noticing a difference at the tap.

For utilities exploring demand response, virtual power plants (VPPs), or bring-your-own-device (BYOD) programs, water heaters are an easier entry point than batteries or EVs, because the hardware is common in most homes, and a growing share of it is grid-ready out of the box. So, how can smart water heaters function inside demand flexibility programs? What market data says about adoption? How are utilities developing their enrollment to scale their customer programs? Read on to learn more.

 

In This Article

• What demand flexibility means and where water heaters fit
• How smart water heaters function in demand response, VPP, and BYOD programs
• Market penetration and adoption data
• Building enrollment through customer engagement
• Why contractor networks matter for program growth
• Frequently asked questions
• Glossary of key terms

 

What Demand Flexibility Means for Water Heating

Demand flexibility is the ability to shift, shed, or reshape electricity use in response to grid conditions, rather than consuming power whenever it’s convenient. Demand response is a specific demand flexibility strategy, designed to curtail usage through aggregate load shifting, often specific to individual device types, depending on the scale of the program. As a whole, demand flexibility describes not only event-based curtailment but also pre-heating, time-of-use scheduling, and ongoing optimization across a fleet of distributed devices.

Water heaters are well suited to this role because they act as thermal batteries. A standard 50-gallon electric tank can go several hours without new heating input while still delivering hot water, giving grid operators a wide window to shift when that heating occurs. According to a 2023 analysis from the American Council for an Energy-Efficient Economy (ACEEE), once a customer signs up for a demand flexibility program, the utility can signal the water heater to preheat ahead of an event or hold off heating for a period, without requiring any change in household behavior.

Federal policy has taken notice, too. The ACEEE reported that the U.S. Department of Energy has proposed new efficiency standards for electric storage water heaters that could save consumers an estimated $11.4 billion annually, a shift expected to expand the pool of grid-ready water heaters available for these programs.

 

How Smart Water Heaters Operate Inside DR, VPP, and BYOD Programs

Demand Response

Traditionally, demand response programs have functioned through the use of first one, and later two-way radio switches, which were physically placed on participating devices. By leveraging the Internet of Things (IoT) and WiFi-enabled smart technology, modern demand response programs communicate wirelessly to start and stop aggregate conservation events.

For water heater demand response programs, this allows utilities to briefly pause heating elements or delay cycling during peak periods. Some programs use advanced load-up functionality, which is a feature that allows water heaters to heat past the normal set point shortly before an event so that the tank has extra thermal reserve once heating is paused, effectively rendering demand events invisible to program participants.

 

Virtual Power Plants

A virtual power plant (VPP) is an aggregation of otherwise disparate distributed energy resources (DERs) including solar, battery energy storage systems (BESS), electric vehicles, EVSE chargers, and smart home devices including thermostats and water heaters that conserves power by shifting load to off-peak periods of demand through aggregate conservation.

When utilities or aggregators combine enrolled water heaters, alongside thermostats, batteries, and EV chargers, into a single dispatchable resource, that aggregation functions as a virtual power plant (VPP). Pacific Northwest National Laboratory has modeled populations of water heaters at scale, finding that coordinated, population-level control can meaningfully reduce peak demand while limiting wear on individual units.

 

BYOD Programs

Rather than utility-installed hardware, BYOD programs let customers enroll a water heater they already own from an approved manufacturer list. As Utility Dive reported, BYOD originally centered on thermostats but has since expanded to batteries, EVs, water heaters, and other smart appliances, broadening the eligible pool without utilities carrying installation costs.

The common thread across all three models is CTA-2045, a modular communication port that lets water heaters and other devices speak a common language to utility control systems. EPRI has led much of the standard’s development with utilities and manufacturers across multiple demonstration phases, and Bonneville Power Administration’s multi-year regional pilot with CTA-2045-enabled water heaters in Washington and Oregon concluded the approach was promising enough to recommend the capability for all Northwest water heaters going forward.

 

Market Penetration: Where the Hardware Stands Today

Enrollment potential depends heavily on how much grid-ready hardware is already installed or being sold:

• Electric storage water heaters, the category most commonly used in demand flexibility programs, held roughly a 54% share of U.S. water heater shipments across 2024 and 2025, according to market tracking from RMI, meaning the majority of new units sold are already electric and technically eligible for grid connectivity.
• Heat pump water heaters, which pair demand flexibility performance with efficiency gains, remain a smaller but growing slice of that electric category, with industry groups estimating double-digit annual sales growth even as tracking has become harder following federal ENERGY STAR program cuts.
• Utility incentive programs are already active in multiple states. Southern California Edison’s SmartShift Rewards program, for instance, pays customers with connected heat pump water heaters an upfront incentive plus a recurring monthly credit for continued participation.

The takeaway: hardware penetration is rising but not yet universal, and a meaningful share of eligible water heaters go unenrolled simply because customers don’t know the option exists.

 

Building Enrollment Through Customer Engagement

Hardware alone doesn’t create a demand flexibility resource: enrollment and participation does. Do you want your customer programs to flourish? You need willing customers, so try to:

• Meet customers at the point of purchase. Enrollment tends to be strongest when offered the moment a customer buys or activates a qualifying device, rather than through a separate campaign weeks later.
• Keep incentives clear and recurring. Programs pairing a one-time enrollment credit with an ongoing annual or monthly incentive tend to sustain participation better than a single flat payout.
• Set expectations about comfort. Since water heaters recover quickly once an event ends, addressing “will I run out of hot water” directly in enrollment materials reduces hesitation and opt-outs.
• Report back to participants. Sharing event frequency and grid impact after the fact reinforces that participation matters and reduces attrition over multiple program years.

Demand flexibility outcomes underscore why intentional customer engagement matters: failure to connect with your customers leads to stagnant program growth. Connecting with customers means more than just generic email campaigns targeting customers who already own an eligible device typically convert only a modest share of that audience, but smart demand flexibility marketing like multiple and repeat customer touchpoints, enrollment prompts built into the purchase or activation flow tend to perform substantially better, or developing rapport with installation contractor networks.

 

Contractor Networks Matter

Plumbers, electricians, and HVAC contractors are often the first and sometimes only point of contact a customer has when a water heater is installed or replaced, making them a distribution channel for program awareness that marketing alone can’t replicate.

Utilities that build formal contractor relationships can ensure installers know which models and communication modules qualify for incentives, equip them with simple enrollment materials or referral incentives to hand customers at install time, and capture enrollment at the single moment a customer is already making a water heater decision. Programs that skip this channel often find that even well-designed rebates go underused, simply because contractors and customers alike don’t know qualifying equipment exists.

 

FAQs

Do smart water heater programs affect hot water availability? Generally, no. Programs are designed around brief curtailment windows and preheating strategies specifically so households don’t notice a change during typical use.

What’s the difference between demand response and demand flexibility? Demand response refers to discrete, event-based actions during peak periods. Demand flexibility is a broader term that describes strategies like demand response, but also covers ongoing load shifting and time-of-use optimization beyond single events.

Can customers use a water heater they already own? In BYOD programs, often yes, provided the device is on the utility’s approved equipment list and has the needed communication capability, such as a CTA-2045 port or Wi-Fi connectivity.

What communication standard do most smart water heaters use? Many use CTA-2045, a modular communication port developed with support from EPRI and the Consumer Technology Association, letting utilities send control signals to connected devices using a common protocol.

Are heat pump water heaters better suited to demand flexibility than standard electric models? Both can participate, but heat pump models generally add efficiency benefits alongside their flexibility, which is part of why incentive programs increasingly favor them.

 

Glossary of Key Terms

• Demand flexibility: The broad capability to shift, shed, or reshape electricity consumption in response to grid needs.
• Demand response (DR): program where customers or their devices reduce or shift electricity use during specific events, usually for an incentive.
• Virtual power plant (VPP): A network of distributed resources, such as water heaters, batteries, and EV chargers, coordinated and dispatched as a single grid resource.
• BYOD (bring your own device): A program structure letting customers enroll a pre-approved device they already own, rather than requiring utility-installed hardware.
• CTA-2045: A standardized communication port enabling water heaters and other appliances to receive control signals using a common interface.
• Load-up (advanced load-up): Heating water beyond its normal set point ahead of an event to create a thermal reserve for curtailment.
• Distributed energy resource management system( DERMS): Software utilities use to monitor, coordinate, and dispatch distributed devices as part of a demand flexibility or VPP program.

 

Getting Started

Smart water heaters won’t replace batteries or EVs as flexibility resources, but as one of a fleet of possible BTM DER assets they offer something few other devices can: hardware that’s currently proliferating in your service territory, technology that’s increasingly standardized, and an experience that requires little behavior change. Utilities that pair rising market penetration with intentional engagement and strong contractor relationships are best positioned to turn that installed base into a dependable grid resource.