Here's how your water heater works

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The heater has 2 heating elements in the tank. One in the upper 1/3 and the other close to the bottom. Each element is controlled by a thermostat, upper and lower.... ( it's behind that plastic cover in your pic. ).
With the tank full of cold water, the top element is energised by the top thermostat and the top 1/3 of the water is heated-up. When this water is hot, the top thermostat 'clicks' over and turns the top element 'off' and sends power to the bottom element which proceeds to heat the bottom 2/3 of the water. When it reaches temperature the bottom thermostat 'clicks' off.... so now both elements are off and water is hot.
If you draw off some hot water, the process repeats, i.e. the top element turns on and starts over. Note that the 2 elements are never on together but act in sequence... usually the top one fails and allows the tank to overheat = the red button 'popped'..... HomeD. or Lowe's have replacement t/stats and you can easily change 'em yourself. Buy both, replace top one first and turn the breaker back on... if fixed, return bottom one....
