There are two major types of water heater, those with a tank and those without a tank. Storage-tank heaters may be powered by gas, electric or solar energy, while tankless models use gas or electric. In addition, water heaters may be tied into a heat-pump heating and cooling system.
Traditional water heaters store water in a large tank and keep it at temperature using a thermostat and heating element. These units are relatively cheap, but not terribly energy efficient, as a large volume of water has to be constantly heated. Solar tanks use the sun's energy to maintain hot water temperature, although they may need to be supplemented with a conventional heating unit in colder or cloudy climates.
A tankless water heater uses a powerful heating element to heat water on demand as it flows through the plumbing system, instead of drawing from a prepared reservoir. These units are much more energy efficient, although they require a powerful burner or heating element to ensure water reaches the proper temperature. Gas units are usually the most effective, but electrical units are also available.
Heat-pump water heaters tie the water heater into the house's heating and cooling system, transferring heat between the ambient air and the water inside the tank. These water heaters are energy efficient since they only transfer heat instead of generating it, but they are generally only an option for new construction or homeowners replacing their entire HVAC system.