When I replaced my first water heater, I was excited to get something larger, more efficient, and maybe even a little sexier. As it turned out, getting a different type of water heater wasn't my best option, and now I end up telling my customers the same thing. If you're in need of a new water heater, chances are pretty good that you have a 40 - 50 gallon gas water heater, and your best option for replacement will be with the exact same type.
A standard gas water heater is a pretty simple device - there's a tank that holds water, a burner at the bottom of the tank, and a vent that takes the exhaust gas out of the house through gravity (the warm air rises). There are several other types of water heaters, and I'm going to list some pros and cons of each type.
Standard Gas - This is what makes up the bulk of water heaters in Minneapolis and Saint Paul - I would estimate 95%. They have a low cost, they're easy to replace, and they recover hot water relatively quickly. On the downside, energy is lost by keeping water heated all day. If you're replacing a standard water heater and there is a problem with the chimney or flue (which usually means it's not up to code), it can be very expensive to repair the chimney or bring it up to code.
Powervent - These are similar to standard gas water heaters, but instead of the exhaust gases rising up and out of the house, a fan forces the exhaust gases through a plastic pipe out the side of the house. The biggest advantage is that the exhaust gases don't need to rise up the house through the roof - these water heaters can be vented right through the side of the house. These are a great option if there are problems with an existing standard water heater vent. Unfortunately, they cost about twice as much as a standard water heater. I've also noticed that they are frequently installed wrong; I would guess that about 50 - 75 percent of the powervent water heaters that I inspect are incorrectly installed.
Tankless - This type of water heater definitely generates the most interest. These water heaters only heat the water that you use, so you're not wasting money by keeping 40 gallons of water hot all day. They use about 20% less energy, take up less space, and provide an endless supply of hot water. Unfortunately, they cost about three times as much as a standard water heater, and it's very expensive to convert from a standard water heater to a tankless - so much so that getting a payback in energy savings typically won't happen. Tankless water heaters also provide a limited volume of hot water; a standard tank will give you all the hot water you want until it's gone, but a tankless water heater produces a limited amount at once. There are many other reasons not to buy a tankless water heaters - click the following link for an in-depth research paper on tankless water heaters.
Electric - Electric water heaters are probably the easiest to install and easiest to replace. There is no venting required, so they can be installed in small places or in places where it would be difficult or impossible to run a vent. The biggest downside to electric water heaters is that they take a long time to recover hot water. Once you're out of hot water, you're out for a long time. I don't recommend electric water heaters if you have the choice of using gas instead.
Reuben Saltzman, Structure Tech Home Inspections