On Demand (tankless or instantaneous) water heaters provide hot water only as it is needed. They don’t produce the standby energy losses associated with storage water heaters, which can save you money.

How They Work
Demand water heaters heat water directly without the use of a storage tank. Therefore, they avoid the standby heat losses associated with storage water heaters. When a hot water tap is turned on, cold water travels through a pipe into the unit. Either a gas burner or an electric element heats the water. As a result, demand water heaters deliver a constant supply of hot water. You don’t need to wait for a storage tank to fill up with enough hot water.

Typically, demand water heaters provide hot water at a rate of 2–5 gallons (7.6–15.2 liters) per minute. Gas-fired demand water heaters produce higher flow rates than electric ones. Sometimes, however, even the largest, gas-fired model cannot supply enough hot water for simultaneous, multiple uses in large households. For example, taking a shower and running the dishwasher at the same time can stretch a demand water heater to its limit. To overcome this problem, you can install two or more demand water heaters, connected in parallel for simultaneous demands of hot water. You can also install separate demand water heaters for appliances—such as a clothes washer or dishwater—that use a lot of hot water in your home.

For homes that use 41 gallons or less of hot water daily, demand water heaters can be 24%–34% more energy efficient than conventional storage tank water heaters. They can be 8%–14% more energy efficient for homes that use a lot of hot water—around 86 gallons per day. You can achieve even greater energy savings of 27%–50% if you install a demand water heater at each hot water outlet.