There are several types of water heaters:

• Conventional storage water heaters offer a ready reservoir (storage tank) of hot water.
  
  
• Demand (tankless or instantaneous) water heaters heat water directly without the use of a storage tank.  Either a gas burner or an electric element heats the water. As a result, demand water heaters deliver a constant supply of hot water. You don't need to wait for a storage tank to fill up with enough hot water.

However, a demand water heater's output limits the flow rate. Typically, flow rates are 2-5 gallons (7.6-15.2 liters) per minute. Gas-fired demand water heaters produce higher flow rates than electric ones. Sometimes, however, even the largest, gas-fired model cannot supply enough hot water for simultaneous, multiple uses in large households. Demand water heaters should be sized according to the required gallons per minute (gpm) flow rate and temperature rise required for your largest expected hot water fixture (usually a shower).

• Indirect water heaters use the home's boiler or furnace as the heat source. In boiler systems, hot water from the boiler is circulated through a heat exchanger in a separate insulated tank. In the less common furnace-based systems, water in a heat exchanger coil circulates through the furnace to be heated, then through the water storage tank. Since hot water is stored in an insulated storage tank, the boiler or furnace does not have to turn on and off as frequently, improving its fuel economy.

Indirect water heaters, when used in combination with new, high-efficiency boilers or furnaces, are usually the least expensive way to provide hot water. These systems can be purchased in an integrated form, incorporating the boiler or furnace and water heater with controls, or as separate components. Gas, oil and propane-fired systems are available. 

• Heat pump water heaters use electricity to move heat from one place to another for heating water instead of generating heat directly. Therefore, they can be two to three times more energy efficient than conventional electric resistance water heaters. To move the heat, heat pumps work like a refrigerator in reverse. A heat pump can be used to heat water, either as a stand-alone water heating system, or as a combination water heating and space conditioning system.
  
  
• Solar water heaters use the sun's heat to provide hot water. They can be used in any climate, and the fuel they use, sunshine, is free. Solar water heating systems include storage tanks and solar collectors. There are two types of solar water heating systems: active, which have circulating pumps and controls, and passive, which don't.

Most solar water heaters require a well-insulated storage tank. Solar storage tanks have an additional outlet and inlet connected to and from the collector. In two-tank systems, the solar water heater preheats water before it enters the conventional water heater. In one-tank systems, the back-up heater is combined with the solar storage in one tank.

 

You will need to size both the solar hot water system itself and the back-up electric or gas water heater. It generally makes the most sense to size a solar water heater to provide two-thirds to three-fourths of your total demand, and provide the rest with a back-up system.

Factors that impact the efficiency of the water heating system are system type, fuel, age and energy-saving options. To maximize the efficiency of your water heater, consider the following:

• Choose the right sized water heater for your needs. An oversized water heater will use more energy due to increased standby losses from the larger storage tank. A professional installer can help determine the appropriate size for your home.
  
  
• Select a hot water heater with the highest EF your budget will allow. In water heaters, energy efficiency is measured by the Energy Factor (EF). The EF is based on the amount of hot water produced per unit of energy used over a typical day. The larger the EF number, the more energy efficient the water heater.
  

The most efficient gas-fired storage water heaters have energy factors ranging from 0.60 to 0.65, corresponding to estimated gas use below 250 therms/year.

 

Condensing water heaters have energy factors as high as 0.86. The most efficient electric storage water heaters have energy factors ranging between 0.93 and 0.95, resulting in estimated annual energy use below 4,725 kWh/year.

• Keep in mind the cost of fuel. Gas water heaters are typically more costly to install but less expensive to operate than electric water heaters. The average efficiency of gas water heaters has improved approximately eight percent over the past 25 years.
  
  
• If you use electricity for water heating, consider installing a heat pump water heater. There is little difference between the most efficient electric resistance storage water heaters and the minimum efficiency standard. Fortunately, heat pump water heaters using less than half as much electricity as conventional electric resistance water heaters are becoming commercially available. If you use electricity for water heating, consider installing a heat pump water heater. Otherwise, look for the most efficient electric resistance unit in your size range.
  
  
• Insulate your hot water pipes. Insulating your pipes will reduce losses as the hot water is flowing to your faucet. More importantly, it will reduce standby losses when the tap is turned off and then back on within an hour or so.
  
  
• Purchase a hot water heater with an insulated tank. Insulation of R-24 or higher is recommended. If your hot water tank is hot to the touch, you should install additional insulation. Adding insulation can reduce standby losses by 25 to 45 percent.
  
  
• Set your water heater thermostat at the lowest temperature that provides you with sufficient hot water. For most households, 120°F water is fine (about midway between the "low" and "medium" setting). Each 10°F reduction in water temperature supplied to the faucet will generally save 3 to 5 percent on your water heating costs.
  
  
• Maintain your water heater. Maintenance is important so be sure to drain and flush sediment from the tank twice a year and check the pressure-relief valve once a year to make sure this crucial safety device is not clogged.
  
  
• Consider installing a tankless hot water heater. A tankless hot water heater is typically more efficient than a storage tank model. But make sure the tankless water heater can support the required water-heating load of your household.
  
  
• Use less hot water. In addition to saving energy (and money), cutting down on hot water helps conserve dwindling water supplies, which in some parts of the country is a critical problem. A family of four each showering five minutes a day can use about 700 gallons per week -- a three-year drinking water supply for one person! Water-conserving showerheads and faucet aerators can cut hot water use in half.