There are two types of water heating systems, the conventional tank system that stores and heats water in a tank until it is needed, and the demand or tankless water heating system. The most popular types of fuel used for these two systems are natural gas and electric.

The most common system is the tank water heater. The average U.S. home uses a 40 to 60 gallon tank. The more hot water you use, the larger the tank needed to supply sufficient hot water. The energy is used to heat the water and then maintain the temperature within the tank.

The demand or tankless system does not have a tank. It heats the water as needed, so there are no storage losses as with a conventional tank system. Because there is not a storage tank, gas-fired tankless water heaters have a higher efficiency rating than any other residential water heating system.

The energy efficiency of a water heater is reported as an Energy Factor, or EF. The EF is dependent upon how quickly the energy source (gas or electric) heats the water, how much energy is lost when the water heater is idle and energy lost as the unit cycles on and off.

New gas tank water heaters have an EF of at least .59. New electric storage water heaters have an EF .97. New EF ratings have been implemented recently, so the rating of a currently installed tank water heater could be lower. New gas-fired tankless water heaters have EF ratings that range from .80 to .87.

Because of the differences in fuel types (gas or electric), it is not appropriate to only compare the EF of one type of water heater to another type of water heater. In order to compare gas and electric water heater models on a total energy efficiency basis, additional inefficiencies in the production and delivery of electricity must be included. The efficiency of the natural gas delivery system from the wellhead to the appliance is over 90%. The overall efficiency of the electricity conversion and delivery system is under 30% . Therefore, natural gas water heaters are more efficient than electric models on a total energy efficiency basis.

The First Hour Rating (FHR) should be used to determine the best storage capacity for a household. The FHR value is shown on the yellow "Energy Guide" label and in manufacturer’s specifications.

The FHR is the amount of hot water that the water heater can supply in the first hour of operation. It is a combined measurement of how much water is stored in the water heater and how quickly the water heater can heat cold water to the desired temperature. Use this rating to compare hot water delivery capabilities of similar models and determine the best water hater for your household.

The gas water heater FHR consistently out performs a comparable electric water heater. It is recommended to purchase a larger storage capacity tank if an electric water heater is selected.

Hot water delivery can also be measured by comparing hot water delivery and recovery times. Hot water delivery is explained as "how much hot water can I get before the water turns cold?" Recovery time is the length of time it takes to heat water in the storage tank after all hot water has been withdrawn. In comparison studies, gas water heaters recover and deliver hot water approximately 1/3 faster than comparable electric models.