For decades, tankless water heaters have been used in Europe and other parts of the world where energy prices are steep. Most consumers in North America, however, were not aware of tankless water heaters until recently.

The happy discovery is that, compared to conventional water heaters, these on-demand water heaters can save energy and money while delivering a steady flow of hot water. In fact, a tankless water heater can save money right off the bat through a $300 tax credit.

The familiar tank-style water heater is basically a large container with a heater. It stores a lot of water (typically 40 to 80 gallons), heats the water, and keeps it hot until it’s needed. When hot water leaves the tank to serve a faucet or appliance, it is replaced by cold water, and the cycle repeats. The obvious downside of a conventional water heater is that it wastes considerable energy keeping water hot 24 hours a day, seven days a week, whether or not hot water is needed.

A tankless water heater, as its name implies, doesn’t have a tank. Instead of storing hot water, it circulates incoming water through a series of electric coils or gas burners that automatically heat up when a tap or appliance is turned on. When the fixture or appliance is turned off, the elements or burners turn off.

Why we like it: • 199,000 BTU output but very compact • Electronic ignition • Can be converted to direct-vent

Tankless water heaters are sold in several varieties, from small, electric point-of-use models to larger gas appliances that supply the whole house. If you want to replace a storage water heater, you’ll need a whole house tankless water heater. If you just want to provide hot water quickly and efficiently at a single fixture, such as a bathroom sink, a point-of-use water heater may be the better choice. If you simply want instant hot water at the kitchen sink, a hot water dispenser is the appliance for you.