A water heater system is provided with a solar water heater and an electric water heater having one or more electric heating elements. The solar and electric water heaters are configured to provide a common hot water output. A controller is operatively configured with the water heaters and receives a first signal indicative of a current power demand state of an associated electric utility. In response to the received signal, the controller operates the electric water heater in an energy savings mode during periods of high power demand wherein power consumption of the electric heating elements is restricted. The controller is operatively configured to modulate the degree of power consumption restriction placed on the electric heating elements in the energy savings mode as a function of current hot water supply capacity of the solar water heater.