The largest percentage of the sanitary hot water used in South African buildings is heated by means of direct electrical resistance heaters. This is one of the major contributing factors of the undesirable high morning and afternoon peaks imposed on the national electricity supply grid. Water heating therefore continues to be of concern to ESKOM, the country's only electrical utility company. The so-called in-line water heating system design methodology was developed to address this problem. This paper investigates the potential impact of in-line systems on the national peak electrical demand. A computer simulation model was developed that combines a deterministic mathematical model with a statistical approach in order to predict the diversity factors associated with both the existing and in-line design methodologies. A study was also conducted to estimate the total installed water heating capacity in the national commercial building sector. This figure can be combined with the simulated diversity factor to determine the peak electrical demand. The deterministic model includes the detailed simulation of the hot water storage vessel, the electrical heater and the system control algorithm. The mathematical model for the storage vessel is based on an electrical analogue approach that includes the effects of conduction as well as Forced and natural convection. This model was verified extensively with the aid of laboratory measurements and compared with existing storage vessel models. It was found that the new storage vessel model could predict the supply temperature within 2 per cent for a system configuration with the heater in parallel outside the reservoir and within 12 per cent for a configuration with the heater situated inside the reservoir. This compares favourably with existing models found in the literature. The complete simulation based on the statistical approach showed that extensive application of the new design methodology could result in a reduction of approximately 75 MW in the total maximum peak demand imposed on the electricity supply grid in wintertime. This is 58 per cent of the current peak demand due to commercial water heating and 12.5 per cent of the peak load reduction target set by ESKOM until the year 2015. Copyright (C) 2001 John Wiley & Sons, Ltd.