What exactly is the difference between S1 and S3 standby mode? Which one should I use with MCE? 

S3 is what you use with Media Centre


S0
Working
System is on and fully operational.
Away
System appears off, but the PC is kept operational. The display is blank and the audio is mute.

S1
Standby (Not normally used)
System appears off. The CPU is stopped; RAM is refreshed; the system is running in a low power mode. This state can operate when a card or peripheral does not recognize S3.

S2
Standby (Not normally used)
System appears off. The CPU has no power; RAM is refreshed; the system is in a lower power mode than S1.

S3
Standby (Normally used)
System appears off. The CPU has no power; RAM is in self refresh; the power supply
is in a reduced power mode. This mode is also referred to as 'Save To RAM'.

S4
Hibernate
System appears off. The hardware is completely off, but the system memory has been saved as a temporary file onto the harddisk. This mode is also referred to as 'Save To Disk'.

S5
Off
System is off. The hardware is completely off, the operating system has shut down; nothing has been saved. Requires a complete reboot to return to the Working state. The clock works.

Thanks man. What settings should I set windows to in power-save settings? I hope you see what I mean, even though the picture is in swedish.

It depends on what you are trying to achieve.  For example, I use my main Media Center as a Windows Media Connect server, so I want it to be on all the time and I have my setting exactly as you have them in your screenshot.

If you want your Media Center to go into S3 when you are not using it, you need to set the standby timeout to some value (probably 15 minutes to 30 minutes).  If it doesn't go into standby it's because a peripheral on  your system is preventing it from happening, probably because it doesn't properly support standby.

The biggest difference between S1 and S3 (other than some peripherals don't support S3) appears to be that most motherboards keep the fans running in S1 and switch them off in S3.  There may be an option in your motherboard BIOS to define standby as either S1 or S3, so check it's set to S3 if you are doing this to reduce the noise when not using your system.

Cheers,
Andy

BTW, my motherboard does not appear to support S3 standby, and I want the machine quiet when I'm not using it, so I have it set to hibernate.  MCE will wake my machine out of hibernation in order to record a scheduled recording, so that works for me.

People have reported problems with MCE not going back into standby, after recording is finished, there is are a couple of utilites people have written, check the plugins forum here.