Abstract: A water heating system comprises a lower energy storage tank connected with a source of energy and an upper tank mounted on top of the lower. The upper tank may be a conventional water heater or a water storage tank connected at an outlet therefrom with an instantaneous type water heater, and the tanks are interconnected through a valve. The valve operates to direct incoming cold water through a heat exchanger in the lower tank for being preheated prior to introduction into the upper tank and accommodates a thermal syphon effect between the tanks when fresh water is not being supplied, whereby heat energy is automatically transferred from the lower to the upper tank. The lower tank may advantageously and economically comprise a conventional drum, for example a 55 gallon drum, and all system components are mounted in a cover assembly for the lower tank, so that the upper tank need not be specially fabricated, with the cover assembly also serving to support the upper tank.