In the Portland area the majority of water heaters are traditional, "Storage Tank" units which keep a large tank of water (usually 40-50 gallons) hot all day long using gas or electricity.
Gas vs. Electric
I generally favor gas heaters (unless the solar system addition is planned). Electric water heaters may claim a higher EF (efficiency rating) than gas (approximately 0.9 vs 0.6), but that measure does not take into account how the electricity is produced or any transmission losses in its delivery. Too much of Oregon's electricity still comes from burning coal which is very polluting compared to natural gas. Much of that coal burning takes place in Wyoming, and significant power is lost as the electricity is transmitted to the Northwest. If the efficiency of the entire process is taken into account then gas heaters match up as well or better than electric. Additionally, gas heaters have a faster First Hour Rating (FHR) which means they recover/re-heat faster so that often a smaller tank can be used which saves on both initial and operating costs.
Typical Gas (left) and Electric (right) "Storage Tank" type water heaters
Tank vs. On Demand
Growing in popularity is the "Tankless" or "On-Demand" water heater. These systems heat the water instantly when a hot water tap is turned on. They reduce energy costs by eliminating the "standby" cost of keeping the large tank of water hot all day long. These heaters have the added benefit of producing a bottomless supply of hot water with no recovery time. They also take up less space and can even be installed on the outside of the home. On demand heaters are more expensive to install than storage tank heaters, but they are highly efficient and will likely be less expensive overall over the life of the appliance. Tankless water heaters also qualify for significant incentives and tax credits.
An On Demand, "Tankless" Water Heater
SOLAR and HEAT PUMP WATER HEATERS
The most efficient water heater systems are solar systems or systems connected to a heat pump. At times these water heaters can heat water at no incremental utility cost. These systems are expensive, but significant incentives are available and these systems should be considered as an option to achieve maximum efficiency (see links below for more information).
PLAN AHEAD
Water heaters tend to break down or spring leaks without much notice. As a result, frantic homeowners frequently replace the broken heater with another of the same kind in order to make the process as quick as possible. If you want to make a change in your type of system you do need to plan ahead. If you are converting to gas, or switching to a tankless heater, there are likely to be changes needed in your piping, gas supply, or venting. It's best if these modifications can be made on a timeline without the pressure of a home with no hot water.
If your water heater is more than 12-15 years old chances are it is inefficient compared to even today's basic models and in the final stage of its working life, or both. Take action now to select the water heating system that is the best energy choice for your household.
The U.S. Department of Energy offers a good background on water heating options.