You should check either with your local gas company or with your Town to find out about building codes, and to make sure you are not in violation. You probably need a new water heater. The useful life of these things is 20 years the most. They usually quit very suddenly and leave a big flood. You should consider yourself lucky that yours is "warning" you that it's time to replace it. The new gas heaters and water heaters are much more efficient than the old ones. Your gas bills will be lower. And, because of their higher efficiency, they emit less smoke. Therefore, even if your chimney is too small for your currect system, it may be fine for a new one. But you do need to get impartial assessment from either the gas company and/or your local municipality. Your system may have been approved according to codes that were used when the chimney was build years ago. But it may now be a violation because codes may have been updated. In that case, your system may be okay if there is a "grandfather" provision that avoids forcing all homeowners to update their systems.

They are thermostatically controlled. The tank should still have water but at a less than full level. Next time turn the WH control to pilot.

If you go with any sort of solar system, make sure it has a gas backup and not electric. My energy costs went up $100/month when I added our solar system down here in San Diego. I am now getting it corrected with the installation of a small gas tankless unit, using the solar storage system as a pre-heater. If you're building the home then many of the traditional drawbacks of tankless don't apply to you. You can build in the correct gas line and venting from the start. If I were in your shoes I'd probably go tankless (30 percent tax credit this year -- see the stimulus law or visit www.energystar.gov). If a single unit won't handle your demand then get two. And plumb it with the small tank system (10 gallon) for recirculation and to overcome any sandwich problems. This approach has been detailed in this forum somewhere.

Our concerns are how difficult they each would be to install, difference in cost on the electric & water bills, etc. The first question is if you have sufficient space in your electrical panel to install a double pole breaker. Older homes, which I'm guessing yours may be, especially with gas appliances tend to have pretty small electrical panels. From there it's just a matter of running a circuit of the appropriate size. As for cost, there will be an yellow sticker on any water heater that will give you some idea of what it will cost to operate. Obviously that's an average and your experience will likely be somewhat different. There shouldn't be a change in your water bill unless you start using more (or less water). If you have no plumbing or electrical experience, this is a project best left to the pros.