A control system for an electric water heater having an upper heating element and a lower heating element includes a control module that controls operation of the electric water heater by selectively toggling the upper and lower heating elements between an ON state and an OFF state. The control module maintains a stratification of water within the water heater including a first volume maintained at a set point temperature and a second volume held at a setback temperature, which is less than the set point temperature. The setback temperature is low enough to maintain the stratification yet high enough to allow the upper heating element to heat water from the second volume to the set point temperature prior to exiting the water heater.