No amount of upgrades on an old water heater will make it work as well as a new energy-efficient model. But if the heater isn't near the end of its life, you're going to see less financial benefit through replacement. If you have to get a new one anyway, an efficient water heater is the only way to go. Innovative technologies like solar water heaters and increased insulation are just two ways you can end up saving money.
One way to make your water heater more efficient is to insulate both the tank and the pipes:
Ideal temperature settings
While most water heaters can be set anywhere from 120 to 180 degrees farenheit, it's often suggested they be set between 120 and 140 F (closer to the lower number). A 10-degree-farenheit reduction can save 3 to 5 percent on your next bill. Set the thermostat to its lowest setting or turn it off altogether (not in winter) if you won't be home for several days. Just make sure you know how to start it back up if it's a gas water heater.
The best way to ensure water heater efficiency is simply to use less hot water. It sounds difficult, but simple changes, like a water-saving shower head and faucet aerators can cut hot water use in half. Upgrading to water-efficient appliances helps even further.
The higher the number, the more energy efficient (although it doesn't always mean it's the cheapest). An electric water heater can have the highest efficiency (up to .95) but still cost more to operate than some of the other water heater types if electricity is several times more expensive.