Energy Tips by Green Energy - Insulate Water Heater
To avoid heat loss, try insulating your hot water heater.
For electric hot water heaters, you can wrap it in a fiberglass insulation blanket, but be careful not to cover the thermostat.
For natural gas or oil hot water heaters, you can wrap it in a fiberglass insulation blanket, but be careful not to cover the water heater's top, bottom, thermostat, or burner compartment.
You can also insulate the first six feet of the hot and cold water pipes connected to the water heater.
Regardless of your type of unit always follow the manufacturer's recommendations and when in doubt, get professional help. Insulation for the heater and pipes can be found at your local home center or hardware store.