It’s no wonder tankless water heaters are becoming a staple of green building. Unlike tank-type water heaters that keep gallons of water at usable temperatures 24/7, tankless heaters provide hot water on demand, saving energy and money. In fact, the Department of Energy estimates that tankless water heaters can be 24% to 34% more efficient than tank units. According to Jack Banker, manager of tankless sales for Rheem, homeowners can save about 20% to 25% on their heating bills.

This technology isn’t new—it’s been in use in Europe, South America, and Asia for decades—but the units have only recently begun to gain traction in the United States as Americans look to cut energy costs. Technology is catching up with demand, too, as vendors are responding with whole-house tankless systems that offer capabilities beyond the capacity of early point-of-use units.

Efficient Options

The basic operation of tankless water heaters is fairly straightforward: When someone opens the hot side of a fixture, water flows into the tankless unit and past a sensor that triggers the heater to bring the water to a pre-set temperature for delivery to the fixture. The quick recovery rates on tankless water heaters allow them to operate on demand, and as long as that fixture is asking for hot water, the tankless unit will continue to heat and deliver it.

Not long ago, availability of tankless units was limited to small-capacity point-of-use systems, which would only provide enough hot water for the location where it was installed, such as a for a bathroom or kitchen sink. Now the majority of manufacturers offer whole-house systems, which can provide enough hot water for large homes with multiple bathrooms. As a result, the tankless water heater industry has grown on average about 25% per year since 1999, says Mat Katz, retail marketing manager for Bosch.

Over the years, vendors of tankless water heater units have improved their products’ performance by merging gas condensing and tankless technology, adding direct-vent technology, and integrating temperature and carbon dioxide sensors. In addition, the units have gotten more compact and more efficient.

The efficiency of tankless water heaters depends on a variety of factors, including the design and the fuel source. Gas units are about 80% to 85% efficient because residue heat is lost through the vent pipe, while electric units are nearly 100% efficient because they convert almost all the electrical energy they consume into heat. However, some homeowners prefer gas tankless water heaters because they are said to heat water more quickly. (A common complaint of tankless technology is that users must wait a few seconds for the ambient-temperature water to be expelled, the temperature to rise to the set point, and the hot water to flow through the sensor. Some vendors are circumventing this problem by allowing their systems to be installed with a circulating pump.)

Whether the best option is to go with a gas or an electric tankless water heater also depends on fuel prices and availability of natural gas in a particular area. The desired location of the tankless water heater plays a role as well. Electric tankless water heaters can be installed closer to the point of use, even for whole-house models, which can reduce the wait time for hot water; a gas unit must be installed where it can be connected to a gas line and vented outdoors. Some of these gas units offer direct-vent technology, which pulls combustion air from outside the home and discharges it through an outside vent. As a result, the tankless water heater unit isn’t discharging conditioned air from inside a home to the outdoors.