You should start your journey by reading How Water Heaters Work to fully understand how a storage tank heater operates. We'll get into tankless models in the next section, but for now let's look at the fuel options you can use for a storage tank water heater.
Electric - uses large coils that hang down into the tank to heat the water. The coils are similar to the ones in an electric oven. Generally, electric water heaters aren't as efficient as those powered by other fuel sources, and electricity is more expensive than natural gas or propane. However, they're less expensive up front and don't require venting. If your water demand is small, then it may be a good way to go.
Natural Gas - uses a gas burner at the bottom of the tank, with a venting chimney that runs through the center and out the top. The carbon dioxide and water vapor byproducts are vented through the chimney and then run outdoors through your house chimney or side wall vent. A gas pilot light or electric spark produces the flame. Natural gas models cost more than electric heaters but are more efficient to operate.
Propane - works in the same way as a natural gas, but uses propane as the fuel source. Propane is generally used as a fuel source when a home doesn't have access to natural gas. The propane is supplied from a large tank on the property.
Oil - similar to gas and propane models, but mixes the oil with air using a power burner to create a vapor mist, which is then ignited by an electric spark. Like propane, oil heat is typically used when natural gas isn't available and is also delivered to the location and stored in a large tank.
Solar - uses the heat from the sun to produce hot water. The heat is harvested by an "absorber" panel that typically sits on your rooftop. Tubes inside the panel either directly heat the water flowing through them or a transfer fluid that warms a heat exchanger. This exchanger heats your home's water in a storage tank. Solar systems can be used in conjunction with a conventional system, much like a hybrid car uses both gasoline and electricity, to cut up to 80 percent of your water heating bill.
Heat Pump - takes heat from the air and delivers it to the water via electricity. They're two to three times more efficient than electric water heaters, but consumer demand is low and there are few manufacturers. They cost more up front than conventional units and can only be used in areas where the temperature stays between 40 and 90 degrees Fahrenheit (4.4 to 32.2 degrees Celsius) year-round.
As you can see, your decision largely depends on where you live. If you have access to natural gas, it can be a very fuel efficient way to go. If you live in outlying areas where it isn't available, then your home is already set up with either oil or propane. Solar heaters are best used in areas where there's abundant sunshine, so if you live in Seattle, then it's probably not the best idea. Heat pumps can shave a great deal of money from your bill but are fairly uncommon, and this scares off many consumers. If you want a cost effective system that's easy to maintain and service, then a natural gas water heater is probably your best bet.
In the next section, we'll see what's going on with the tankless revolution and determine if one might be right for you.