Tankless Water Heater Explained | On-Demand Hot Water

If you’ve ever run out of hot water mid-shower, a tankless water heater solves that problem by heating water instantly as it flows through the unit, rather than storing it in a tank. Here’s what you need to know about how they work, what they cost to run, and what installation actually involves.

How Does a Tankless Water Heater Work?

Tankless units, also called instantaneous water heaters, heat water on demand using either gas burners or electric elements. When you open a hot-water tap, cold water travels through the unit where a powerful heat exchanger warms it instantly before it reaches your faucet. No storage tank means no standby losses — the energy wasted keeping 40 gallons hot 24/7 in a traditional tank.

That efficiency gap is the core reason homeowners switch.

What Installation Involves

Installing a tankless water heater is more involved than swapping a storage tank, and manufacturer manuals stress that their installation overviews don’t replace the full Installation Instructions in the Use & Care Manual. The typical sequence from official Rheem, Rinnai, and Stiebel Eltron guides looks like this:

• Mount the unit securely to wall support — Rheem’s guide says to fasten the mounting bracket to wall studs, lower the heater onto it, then secure both upper and lower brackets to the wall brace.
• Connect gas piping on gas models, following local codes for pipe sizing and shutoff valves.
• Plumb the water lines — Rinnai’s manual specifies connecting cold water to the 3/4 in. MNPT “C” connection and hot water to the 3/4 in. MNPT “H” connection.
• Purge air from the lines before powering on — open several hot-water fixtures and let water run 2 to 3 minutes until flow is steady and air-free.
• Energize the unit and check every connection for leaks.

Electric models add specific electrical requirements: proper wire gauge for the breaker size, a separate ground conductor for each incoming circuit, and verified tight connections. Some electric units must be installed vertically only. And a tankless kit guide notes the pressure relief valve (PRV) needs a 3/4 in. port size with no shutoff valve in its connection path.

Codes, Standards, and Sizing

Because tankless heaters draw far more energy at once than tank models, your installation must comply with building codes. The DOE’s guidance references these specific standards: NFPA 54 and ANSI Z223.1-2018 for gas installations, Z21.10.3 / CSA 4.3-2017 for gas water heaters, the 2018 International Plumbing Code (IPC), and the 2021 International Residential Code (IRC) for homes.

These codes govern venting, gas pipe sizing, electrical circuits, and clearances. Your local building department may adopt newer or amended versions, so verify before you buy.

Costs, Payback, and Choosing a Unit

The 25-75% energy savings DOE reports translate to real payback, but the math depends on your household’s hot water usage, fuel type, and local utility rates. A family of four using lots of hot water sees faster payback than a single person. Gas units cost more upfront than electric but typically offer lower operating costs where natural gas is available.

When choosing a unit, the key spec is flow rate in gallons per minute (GPM) at your incoming water temperature — not the unit’s maximum rating. In cold climates, incoming water arrives colder, so you need a unit with a higher GPM rating to heat it to shower temperature. If you’re comparing electric units, our tested roundup of 220-volt tankless water heaters breaks down which models actually deliver their rated output. Per DOE’s Zero Energy Ready Home program, the most efficient setups pair a properly sized tankless unit with low-flow fixtures.

If your research leads you to a gas unit, hire a licensed plumber or HVAC contractor familiar with NFPA 54 venting requirements — this isn’t a weekend DIY project for most homeowners. For electric units, verify your electrical panel has capacity for the additional circuit load before purchasing.