Some estimates suggest that heating water accounts for roughly a third of a home's energy consumption [source: Consumer Reports]. Whether you're building a new house or trying to make your current home more eco-friendly, improving your water heater's efficiency can be an effective investment.
Understand one thing, though: This type of home improvement can be an expensive undertaking. Tankless water heaters, which heat water as needed rather than storing it in an insulated chamber, are some of the most efficient heaters available. However, they can cost two to five times as much as a traditional tank water heater, and installing one in an existing house can require costly upgrades [source: Tennessee Valley Authority]. Still, if you want a very efficient water heater and can afford it, a tankless water heater is a good option.
For homeowners on a tighter budget, there are other ways to save on water-heating energy costs. For starters, make sure your water heater is the right size for your home. While a too-small heater may not meet your needs, an oversized water heater will waste energy. Check the heater's First Hour Rating (FHR), a measure of its ability to produce water during high-demand situations, to get a sense of how well it meets your needs [source: Consumer Reports].
Another measure to consider is the heater's Energy Factor (EF). This standard measurement can give you a sense of how efficient one heater is when compared to another. The higher the EF, the more efficient the heater [source: Consumer Reports].