Water and air both have differing coolant properties. Water is able to absorb a lot more heat than air, which means that cold, flowing water is a lot better at extracting heat from something than air is.... But water also loses heat a lot slower than air, which means it's a terrible coolant once it's already warm, especially if it doesn't have air around it to evaporate into. This is why we use water as both a coolant and as a heater (in central heating, for instance, where water's slow heat release allows us to heat a room far more consistently and with greater fuel efficiency than hot air). An oven that contains water and is heated to a given temperature is far more efficient than one that contains air (see: a pressure cooker. And before anyone goes 'oh, but you need metal to make a pressure cooker!': That's only true for us because we don't live underwater. The added pressure of an underwater environment makes pressure cooking viable with less strong containers. See: boiling a whole egg vs. air-heating a whole egg. The former results in a delicious boiled egg, the latter results in an exploding egg, due to pressure differences).
Also, for reference: A naked flame is a flame that is completely unprotected (i.e. a candle). We use covered flames for most of our uses of fire (be it ovens, forges, etc...) specifically because airflow IS a pretty good coolant (which is why a candle goes out when you blow on it) and leaving the flame unprotected is a good way to lose a lot of useful heat. An internal combustion engine or the turbines in powerplant (which work by heating water, by the way, just saying) are decidedly not naked flames, they're contained.
The fact of the matter is that an Aquatic species wouldn't even need to invent a way to make fires to reach the Iron Age (or more accurately the Naval Brass age). All they need is to set up a forge around a hydrothermal vent to capture enough heat to forge the Copper, Zinc and Nickel that are already very common around said vents into water-resistant brass (which requires fairly low temperatures to make any way) and, presto, metal tools.