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A water heater that starts out with hot water and gradually cools to luke-warm water can have many possible causes, from high usage to an undersized tank to a plethora of other water heater maladies. One of the possibilities that most homeowners don't consider is a damaged dip tube.
A dip tube is attached to the cold water inlet and forces the incoming cold water down to the bottom of the tank to get hot. Hot water is more buoyant than cold water and therefore it rises to the top of the tank and exits to your shower. If the dip tube is broken or cracked, the cold incoming water can't get to the bottom of the tank to get hot, and instead mixes with the warm water at the top of the tank on its way to your shower. You would typically start with a nice hot shower and, fairly quickly, the water would get cooler.
The fix here is to replace the dip tube. You will need to remove the cold water inlet nipple and pull out whatever is left of the dip tube and insert a new one.
As usual, you need to consider the age of your water heater. It may not be worth it to spend the money to repair your old one rather than replacing it with a new water heater. I've seen many instances where a homeowner spent a couple hundred dollars to repair an old water heater, and then the tank leaks the following month. You may want to bite the bullet and apply the money towards a new one.
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