The efficiency of fuel-fired water heaters is defined as the rate of energy supplied to the water divided by the rate of energy input based on the lower heating value of the fuel. The lower heating value is the heat of combustion with the assumption that the water in the flue gas leaves as vapor. One of the losses of water heaters is a standby loss that occurs when the burner is shut off but air from the equipment room flows by natural convection up past the hot surfaces of the heater and carries heat out the stack. Many fuel-fired water heaters are equipped with dampers that close when the burner turns off, and some larger heaters are equipped with modulating air control that regulates the flow of combustion air so that there is enough air for complete combustion but not enough to carry heat away in the excess air. Typical efficiencies of commercial waters heaters are approximately 80 percent.

The size of the heater is sometimes chosen larger than the maximum design heating capacity in order to have excess capacity to bring the temperature of the building up after a night or weekend setback. When this extra heater capacity is required, it is important that the piping distribution system also be sized larger than design;1 otherwise the distribution system becomes a bottleneck in transferring the extra capacity to the conditioned space.