Depending on your climate, consider a heat-pump water heater, which is more efficient than a conventional electric water heater. Though a heat-pump water heater may have a high initial cost, it can save up to 50% of your water heating bill, but will only work in moderate climates, so make sure your climate works for this before purchasing one. Something else to consider is that heat pumps can be added onto your water heater or purchased as an integral part of a new water heater.

Hot water heater efficiency ratings

The next step once you determine the fuel type you are going to use is to determine the efficiency you want to have, and what you are willing to pay for it. Efficiency of water heaters is indicated by their energy factor (EF), which is based on recovery efficiency, standby losses, and cycling losses. The higher the EF, the more efficient the water heater. Electric resistance water heaters have EFs ranging from 0.7 and 0.95; gas water heaters from 0.5 and 0.6, with some high-efficiency models ranging around 0.8; oil water heaters from 0.7 and 0.85; and heat-pump water heaters from 1.5 to 2.0. Everything else being equal, select a water heater with the highest energy factor (EF). Other things that influence the efficiency of your water heater is how thick the tank insulation is, thus look for a water heater with at least one-and-a-half inches of tank insulation and a heat trap.

In the United States, all water heaters are sold with Energy Guide labels to indicate their energy efficiency. These labels provide estimated annual operating costs, and also indicate the cost of operating the models with the highest annual operating cost and the lowest annual operating cost. By comparing a model's annual operating cost with the operating cost of the most efficient model, you can compare their efficiencies. So, even if you do not know anything about water heaters, choosing a water heater does not have to be difficult.

First Hour Ratings (FHR)

Although some consumers buy water heaters based on the size of the storage tank, the first-hour rating (FHR), provided on the Energy Guide label, is actually more important. Why? Well, it tells you how much hot water the heater will deliver during a busy hour. Or in other words, when everyone is taking a shower in the same hour, how much water would you estimate your household's water use is? Once you determine a number, look for a unit with an FHR in that range.

Tankless Water Heaters

A newer option for water heaters is the tankless water heaters. This is a great option that should be considered when replacing a water heater or when building a new home. Tankless water heaters (also known as demand water heaters) only produce hot water when you need it. This means you save money because you avoid energy losses due to storing hot water. However, these type of water heaters are not ideal for everyone as they have a low flow rate, thus are not be ideal for large families.

For safety as well as energy-efficiency reasons, when buying gas- and oil-fired water heaters, look for units with sealed combustion or power venting to avoid back-drafting of combustion gases into the home.

Finally, it can save you energy and money to put some thought into the best location for your water heater. Whenever possible, do not install the water heater in an unheated basement. Also try to minimize the piping runs to your bathroom and kitchen as water will cool as it runs along the pipes, which means you have to work harder for your hot water, and that work turns into dollars on your utility bill.