Energy-Efficient On-Demand Water Heaters

Why pay to keep water hot when you’re not using it? Installing an on-demand water heater will lower your energy bill while providing exactly as much hot water as you need when you need it.

On Demand Water Heaters

You could save up to $75 a year with an on-demand water heater!


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Although some conventional water heaters are more energy-efficient, most older water heaters and many lower-priced models waste about 20 percent of the energy they consume. Much of the heat they produce escapes through the wall of the tank as the hot water sits unused for hours at a time. This is known as standby loss.

Besides being inefficient, storage water heaters (conventional water heaters) don’t last long — only about 13 years. Homeowners can increase the life of their water heaters by lowering the temperature to a more reasonable setting, by periodically flushing sediment from the bottom of the tank, and by replacing the anode rod. Some of these measures also save energy.

If your water heater is more than 10 years old and has not been maintained, it may be approaching the end of its useful life. If it’s leaking or showing signs of rust, it definitely needs to be replaced. So consider your options before it goes kaput and you have to make a rushed decision to get hot water back. Now might be the time to install a tankless water heater.

How Do Tankless Water Heaters Work?

Also known as “instantaneous” or “tankless” water heaters, on-demand water heaters are surprisingly compact units. Some are designed to meet the needs of a laundry room or bathroom, but others provide hot water for an entire house.

Like conventional storage water heaters, tankless water heaters provide hot water 24 hours a day, 365 days a year. However, they meet this need without the standby losses of storage tank heaters.

Tankless water heaters don’t suffer from standby losses because they don’t store hot water — they generate it as it’s needed. When a hot-water faucet is turned on, cold water begins to flow into the water heater. A flow sensor inside the tankless water heater detects water flow and sends a signal to a tiny computer inside the unit. The computer sends a signal to the gas burner or electric heating element in the water heater, turning on the heat source. Water flowing through the heat exchanger in the tankless water heater heats up rapidly — increasing in temperature from about 50 degrees to 120 degrees in a matter of seconds.

Estimated Energy Savings

Because tankless water heaters eliminate standby losses, replacing an old, inefficient water heater with a compact tankless water heater will reduce your annual energy bills. The U.S. Department of Energy (DOE) projects savings up to 30 percent on the cost of heating water, compared to a storage water heater.

Actual savings depend on several factors, primarily the efficiency of the new water heater and the amount of hot water a family uses each day. Also, using electricity instead of natural gas is a much more costly way to heat water.

For homes that use up to 41 gallons of hot water daily (probably a two-person household), the DOE estimates savings of 24 to 34 percent on the cost of providing hot water via a tankless heater compared to a conventional storage-tank heater. In homes that use substantially more hot water, around 86 gallons per day (probably four or more people), the DOE estimates reduced savings, only about 8 to 14 percent. This is because there is less idle time and less standby loss with a conventional water heater if a lot of hot water is used throughout the day. (Hot water use varies significantly depending on your habits. Estimate how much hot water you use by using the Consumer Reports calculators.)

For large families, it may make more sense to stick with an energy-efficient conventional water heater and implement other hot-water saving strategies — such as installing water-efficient shower heads, dishwashers, and clothes washers — to cut down the quantity of hot water used, rather than changing the way water is heated.

Even greater energy savings can be achieved by installing a tankless water heater at major points of use — for example, near the master bathroom, a washing machine, or kitchen. (This reduces the length of the pipe run, which reduces the amount of hot water left in the line when the faucet is turned off.) This strategy could yield savings ranging from 27 to 50 percent, although savings could be offset by the cost of purchasing and installing additional tankless water heaters.

Additional savings also result from the long life of tankless water heaters. According to the DOE’s Office of Energy Efficiency and Renewable Energy, most tankless water heaters last at least 20 years. And they’re made from easy-to-replace, off-the-shelf parts, so repairing a tankless water heater (not an option with leaking storage water heaters) can result in even longer service. A tankless water heater, with periodic maintenance, could outlast two storage water heaters. If you’re considering a tankless water heater and comparing costs to a new storage water heater, be sure to consider longevity.

By reducing your energy demand, a tankless water heater also reduces your family’s contribution to local, regional and global air pollution. Because they’re smaller, easier to repair, more durable and longer-lasting than storage water heaters, tankless water heaters also reduce resource consumption and landfill waste. Using fewer natural resources means less environmental disruption from mining, as well as pollution.

Possible Downsides

Although tankless water heaters offer many benefits over storage water heaters, they do have a few disadvantages. While they produce a steady stream of hot water, they may not produce enough hot water to meet everyone’s needs if demand is high. If hot water is being used at several locations simultaneously, water temperature at the various points of use may decline. Someone taking a shower may experience a drop in water temperature if another family member is also showering, washing clothes, or running the dishwasher. (The same can occur, however, when using a traditional storage water heater.)

This problem can be corrected (or at least mitigated) by simple, cost-effective efficiency measures, such as installing water-efficient shower heads, taking shorter showers, replacing old appliances with water-efficient models, washing clothes with cold water, and coordinating hot water use.

There are three more-expensive ways to ensure plenty of water from a tankless water heater: 1) Purchase the highest output model you can find. 2) Install two tankless water heaters, although this is a less efficient use of resources. If connected in parallel, two tankless water heaters can dramatically increase the availability of hot water. 3) Install a tankless water heater at each point of use — near bathrooms, the laundry room and the kitchen.

Installing an On-Demand Water Heater

Replacing a storage water heater with a tankless model is a major project, especially if the installation requires rerouting the exhaust (flue) pipe or increasing the size of the opening through which the flue pipe exits your house. Some tankless water heaters require larger flue pipes than those used for storage water heaters. This project requires considerable knowledge of plumbing and electricity and is best done by a professional.

Shopping Tips

If you’re replacing a conventional water heater, you may want to consider buying a more efficient storage water heater. Some manufacturers have made dramatic efficiency improvements. Check out the yellow energy tag, which indicates energy use of the model you are considering versus the average for models in its size range. A side-by-side comparison of an efficient storage water heater and a tankless water heater is worth the time.

By maintaining a new storage water heater — replacing the anode rod as needed and annually flushing the sediment from the tank — you can dramatically increase its life. Installing energy-efficient faucet aerators and shower heads will also lower your water and energy bills.

Tankless water heaters can be purchased through home improvement centers (which offer installation services) and from plumbers. When shopping for a tankless water heater, be sure to consider the physical size of the unit and whether it will fit in the location you have in mind.

Also, pay close attention to the output of the tankless water heater—the rate at which it produces hot water versus your demands. Most tankless water heaters supply 2 to 5 gallons of hot water per minute, which is sufficient for energy- and water-efficient end-users.

Gas-fired tankless water heaters typically produce higher flow rates (more hot water per minute) than electric units. Takagi makes a tankless water heater that delivers up to 7 gallons of hot water per minute, which should be enough for several simultaneous uses, especially water-efficient ones.

Some manufacturers, such as Paloma, rate their units on heat output, measured in Btus (British thermal units). Paloma recommends its 141,000- to 145,000-Btu tankless water heater for homes with one or two bathrooms, and the 199,000-Btu units for two- to three-bathroom homes.

When shopping for a tankless water heater, pay attention to fuel type. Power from natural gas and propane produces fewer pollutants than electric models, if they are powered by nuclear or coal-burning plants. Burning natural gas and propane is nearly twice as efficient as making electricity. Look for a tankless water heater with high energy efficiency (called the “fuel factor” or “energy factor”). For greater savings, purchase a model with an electronic ignition instead of a pilot light.

In addition to the cost of the unit, get an estimate of installation costs before you lay your money down. Like a conventional water heater, a tankless water heater requires a flue pipe to remove unburned gases and pollutants, among them carbon monoxide, which is generated from the combustion of natural gas or propane.

Venting is not required for electric water heaters, which slightly lowers installation costs. Unfortunately, electricity is a much more costly way to heat water.

Finally, if you’re thinking about installing a solar hot water system or already have one in place, purchase a tankless water heater designed to work with these systems. Solar hot-water systems feed solar-heated water to the tankless water heater.

What Will It Cost?

Tankless water heaters aren’t cheap. Prices range from about $600 to $1,500, depending on the size of the unit and its output. Installation can run from a few hundred dollars to $1,000 or more for difficult projects. In contrast, a conventional natural gas or propane water heater costs roughly $300 (for a small tank) to $700, plus about $200 to $300 for installation, depending on the size and any complications. Electric water heaters are typically the more expensive models.

What Will You Save?

Is the extra cost of a tankless water heater worth the investment? A family of four spends about $2,100 a year on energy (the average bill in 2007). With water heating constituting 12 percent of a family’s monthly fuel bill, they’ll spend more than $250 per year for hot water. If they use water wisely, a tankless water heater could save 30 percent — about $75 (or substantially more as energy costs continue to rise). Although these savings may seem modest, in 10 years’ time, they add up to over $750, which partially makes up for the additional initial investment.

Over the 25-year life of the unit, savings could turn the water heater into a money-maker, netting about $1,875 in tax-free savings. Not a bad return, especially considering you’re also saving natural resources and reducing pollution. When doing the math, be sure to include any rebates offered by local utilities and/or tax incentives from the federal government or some state governments. Rebates lower the initial cost, resulting in greater lifetime savings. Check into financial incentives by contacting your state’s office of energy conservation. Every state has one, but the names vary in each state. You can also check the Database of State Incentives for Renewables and Efficiency.

Do Tankless Water Heaters Reduce Water Consumption?

Contrary to popular misconception, tankless water heaters do not reduce water demand in a home, unless they’re installed at the point of use. In most instances, you still have to run the water until the hot water from the water heater purges all of the cold water that’s been sitting in the hot water line between the tank and the end user. As a result, tankless water heaters are primarily installed to save energy, not water.

This article is an excerpt from Green Home Improvement by Dan Chiras. Dan teaches workshops on renewable energy and green building through the Evergreen Institute. 

9/26/2014 6:32:38 PM

We just bought a home with a water heater needing replacement. We chose to install propane for the stove, water heater, and dryer. WE HAVE NOT REGRETTED THE INSTALL ONE IOTA! ALL appliances are much more efficient than our old electric units. As the water here is very hard and we haven't installed a water treatment system yet, We have gotten into the habit of "flushing" the water heater with vinegar every other month, more so if needed. I also have plumbed the house to run the vinegar to clear out the other water lines, facets and shower heads. Regular maintenance would be the only "drawback" in my opinion. (Hey, the vinegar does make things smell fresh) Maintenance takes me about 2 hours, something I'm willing to pay for the benefits of on-demand We like the water HOT! and even with three "taps" opened at the same time, we have never had a problem with "luke-warm" water. We have had some experience with electric unit, both whole house and on site, but the gas unit is the only way to go! We also had a gas conventional heater-- give me the on-demand any ole day! WE ARE NEVER GOING BACK TO ANYTHING BUT GAS! and an ON-DEMAND WATER HEATER

9/26/2014 12:35:56 PM

I would suggest staying away. I did a lot of research and the numbers just didn't add up. I ended up with a new ultra high efficiency NG boiler and a dual coil hot water exchanger tank for about the same price as a properly sized on-demand system. The dual coil exchanger allows this unit to be used in conjunction with a solar collector to supplement the heating of the water.

9/26/2014 10:21:27 AM

I have electric and propane at $5/gallon, so I'm going to get rid of the 50 gallon propane hot water heater, the only appliance on propane in the house. I'll replace it with an 11 gallon electric hot water heater. This forces the rinse, stop, soap, rinse shower on everyone. I guess this would be considered about a 75% savings in water if the average shower was 40 gallons. Then taking away the 30% higher cost of the electric heating, that brings it down from 75% to a 50% savings. Behavior modification by temperature. One can have a longer shower in the heat of the summer, where unheated water feels great.

9/26/2014 10:14:28 AM

I used to think these gizmos made sense, but now I doubt it. The extra cost is outrageous. The article rationalizes this by claiming they last 25 years, but that's doubtful; if you've got mineralized water, think 8 to 10 years. At that point there's no payback at all. Then there's the actual performance. My eco-chic neighbor has three very expensive tankless units -- one for each bathroom. One of these units is 5 feet away from the kitchen faucet. If you don't turn on the kitchen faucet full blast, you get only cold water. If you do turn it on full blast, it takes more than a minute for the cold water to turn hot. Since saving water is something else we should be doing, I don't see how maybe saving a bit of energy otherwise lost from a tank heater offsets the eco-damage. I'm a skeptic.

dale blankenship
1/8/2012 1:14:22 AM

Don't forget that if you have hard water you will need to pair the tankless unit with a softener, Or expect to have the heat exchanger cleaned often. also negating the savings of the unit. As a plumber I just can't recommend them in my area.

greg swob
1/4/2012 4:09:17 PM

A few things not mentioned in the article and maybe a repeat from the Comments below, but here is my view as a homeowner with one of the units in our house. It came with the house or we would not have one. My wife hates it, as it is a huge waste of water and takes a long time to deliver hot water to fixtures. While it does use a little less energy than a storage water heater, but with a 54 second wait to get warm/hot water to some fixtures is a source of issue. We capture the water in a small bucket to use for house plants or other uses, but that is inconvenient. The unit does make some sound, but is located in the basement, so it doesn't bother much. Maybe I should state that I am a professional energy auditor, so I monitor such things as actual energy use, economics, etc. and do not rely on rules of thumb or guesses. For a homeowner to replace a standard tank type model, fuel gas piping will likely need to be redone, a new flue network will need installed and some learning curve will need to be embraced. The learning curve is to get used to wasting water while waiting for hot water, capture the waste water for other uses, time to wait for hot water delivery and maintenance. No one seems to mention maintenance. An annual flushing with an cleaning compound is necessary so minerals do not build up and damage the heat exchanger. I do my own such maintenance, but wonder how many typical homeowners do? A circulating pump, cleaning solution, bucket and knowledge of the steps required to do this are necessary. I am not knocking tankless water heaters, but hope anyone shopping for one has ALL the facts so they can make an informed decision. As with anything else, we need to look with both eyes open and listen very carefully to any sales hype.

4/7/2011 9:22:52 AM

Not only does the tankless cost more, it allows you to take really long showers meaning even more hot water usage. The don't last 25 years in most homes due to water quality eating them up long before you receive the payback. For one person or a vacation home seldom used, or maybe a couple with no children these are a viable option. Or, if you have lots of money, like to spend 30+ minutes luxuriating in the shower, or have 12 kids who all have to be showered every night, this may be the right option. I'll purchase a newer, high efficiency tank type very soon now.

4/3/2011 7:38:28 AM

Interesting article - except that the link to Consumer indicates that these units are not a saving for even small families.

keith hallam_1
4/3/2011 1:38:57 AM

This type of hot water system is not allowed to be fitted on new build in the UK now. It is not an efficient way of providing hot water unless it is used sparingly, like one old person living alone. A properly insulated copper storage tank is best, I stress properly insulated, not a retrofit jacket held in place with string.

mark c
4/2/2011 12:52:21 AM

CFL lights will definitely help you save time and money. Aside from having CFL lights in your homes and buildings you can also try to do other things like installing window films in your windows because for every dollar spent, window film delivers 7X more energy savings. This item that can be added in this article is available in and get totally independent quotes for solar control window film, you will find that people can reduce consumption without any visual effect on their windows for much less than other energy saving technologies. Window tint is a known and trusted "Green" technology, it is cost-effective, energy-efficient and above all, it is eco-friendly.

4/1/2011 10:33:15 AM

Something else to add to the evaluation is noise. I've heard some people complain about how noisy their system is. We were lucky, ours (a Rheem) is very quiet, and we were able to install it ourselves (with much paranoid testing of our gas line joints). As far as electrical knowledge, all we had to do was plug it in like any other household appliance.

daniel mc cutchen
12/25/2010 6:42:07 PM

One feature that should also be considered when researching the available tankless gas heaters is whether or not the ignition system requires electricity. One example of this would be the Bosch Model 1600H, which has an ignition system which operates when water flows, requiring no electricity. This could be very valuable in the event of power failure, or if there is no electric service to your house.

daniel mc cutchen
12/24/2010 9:54:53 AM

This was an interesting article. One point that I did not see addressed is the fact that a tankless gas heater will require a bigger gas line than a conventional storage type. I did some looking into this a few years back, and found that the cost to replumb my gas line would totally negate my projected savings.