This style is the most popular in the US, but is horribly inefficient, potentially dangerous, and almost guaranteed to rust out within 15 years.
Here's a good article on the subject with lots of good comments:
But the jury is still out on what to replace it with. In a new, energy efficient home with a low space heating load, I would use a Split Heat Pump Water Heater when they become available. That way I don't need to pay for a gas tap or that pesky $12/month service fee. The house can be all-electric, and I can make up the electrical usage with PV as costs come down.
What to do in an older home with gas service? The existing gas forced air furnace remains the cheapest way to heat a house like this. Gas is now projected to stay cheap for the next ten years, maybe more. Solar is probably worth it, but you still need a backup source of heat, and in a house like this, gas is probably the best fuel choice.
I'm thinking about an electric tank coupled to a cheap outdoor Aquastar. These units are a bit finicky, but with the right pump, it will be predictable and reliable because it won't see variable flowrates. Of course, the electric elements are unused while gas is cheaper than electric resistance. An outdoor unit because that eliminates a big hole in the house. I think that the storage tank will last 30 years, because I believe that the gas-fired tanks actually rust from the outside in. Water from the flame condenses on the bottom of the tank and rusts it out. Anyone else agree with this theory?
Is anyone doing this? Or is there a better solution for the older inefficient house with gas? Do the outdoor units use too much energy for freeze protection?
Superinsulated Passive solar house, Buderus in floor backup heat by Mark Eatherton, 3KW grid-tied PV system, various solar thermal experiments