The Partnership for Advancing Technology in Housing (PATH) is a HUD-funded program whose goal, in part, is improving the energy efficiency of houses. So when PATH decided to build its first concept home to showcase its mission, it picked the best building technologies available, including insulated concrete forms, metal roofing, and spray foam insulation. For hot water needs, PATH rejected a traditional heater in favor of an on-demand tankless system.

According to the Office of Energy Efficiency and Renewable Energy at the U.S. Department of Energy (DOE), water heating is the third-largest expense in most homes, after conditioning the interior and operating major appliances. Because this accounts for 14 percent to 25 percent of the home's expenses, more building professionals are exploring alternatives to traditional hot water tanks. Their focus is squarely on tankless.

Unlike a traditional tank, which heats a reservoir of water 24 hours a day, an on-demand unit activates only as needed. When a hot water faucet is turned on, for example, cold water travels through a pipe into the unit, where a gas burner or electric element then heats the water. Louisville, Ky.-based manufacturer GE Consumer & Industrial estimates that a tankless device trims water heating costs by as much as 25 percent annually, compared with a standard 40-gallon tank. “Those savings are a result of eliminating standby losses—the energy lost from warmed water sitting in a tank,” the company explains.

The benefits of tankless heaters extend beyond the pocketbook, however. They can deliver a continuous supply of water at a preset temperature, and manufacturers say a properly sized unit will supply hot water to multiple sources simultaneously. DOE reports that typical on-demand units provide hot water at a rate of 2 gallons to 5 gallons per minute, with gas-fired heaters producing higher flow rates than electric units. A traditional tank may run out of hot water, but a tankless unit, if pushed past its limit, will deliver hot water at the preset temperature (albeit at a reduced flow rate).

A tankless unit also offers a design benefit to architects hoping to maximize space in a mechanical room. Such systems are often no bigger than a small suitcase and are usually installed on an inside wall or on the outside of the house.

Tankless has become popular in recent years thanks, in part, to the green building movement and the push toward energy efficiency. In fact, Bob Hitchner, director of tankless sales in the Montgomery, Ala., office of Rheem Manufacturing Co., says the industry sold roughly 327,000 units in 2007—a 29 percent increase over the previous year. “A few years ago people viewed tankless as experimental, even though it's a proven technology that has been around awhile,” he says. “But we have gone beyond the experimental stage now.”

Hitchner says wider acceptance of tankless products is directly related to recent enhancements that have made the technology more palpable. Although tankless technology dates to the 1950s, “the big improvement came in the early '90s with electronic controls,” he explains. “Before, the units were mechanically driven based on the movement of the water.” Now, electronics read the temperature and flow of the water and calculate how fast and how high to heat it. The improvement, he adds, has led to a much more reliable product.

Architects seem to agree. Heidi Richardson, principal of Richardson Architects in Mill Valley, Calif., says she specs tankless water heaters “almost exclusively” because “they work really well, and they lower energy bills.” Michael Rosner Blatt, principal of Los Angeles-based Fung + Blatt Architects, is also a fan. “We've been using tankless exclusively for the last five years,” he acknowledges. “We also have one in our house.” He says today's consumers seem to be better educated about the technology, noting that “a lot of clients ask us about it up front” and that “no one [now using it] has called back to complain.”

A new generation of tankless units with added features could propel tankless to even greater acceptance. Rheem, for example, recently unveiled a 7.4-gallons-per-minute direct vent gas unit that draws makeup combustion air directly from outside rather than from inside the house, leading to better indoor air quality. Fountain Valley, Calif.-based Noritz America Corp. introduced the 531 series of compact units for apartments, condos, and townhouses. West Hatfield, Mass.-based Stiebel Eltron has upgraded its whole-house Tempra electric line with advanced microprocessor controls that eliminate water temperature deviations. And Peachtree City, Ga.-based Rinnai America Corp. has an LS Series that features a commercial-grade heat exchanger, enabling architects to specify the products for domestic hot water alone or for hot water and space heating. Other worthy offerings include products from Takagi Industrial Co. USA in Irvine, Calif.; Bosch USA in Farmington Hills, Mich.; GE; and Monitor Products in Princeton, N.J.

While a tankless heater may seem like a no-brainer, specing one requires consideration of a host of issues. Rheem, which claims to be the only manufacturer offering traditional and tankless units, recently launched SmarterHotWater.com as a tool for professionals interested in going tankless. “Being water heater-agnostic makes [us] a credible resource to help professionals sort out the claims and counterclaims about tank and tankless water heaters,” Hitchner said in a release announcing the site.

Among other things, architects should know that on-demand units cost twice as much as traditional tanks. Additionally, installation can get expensive in a retrofit situation. Replacing a tank heater with a similar unit can run $500 to $800, but replacing a tank with a tankless product will cost up to $3,000, the site says. There's little difference in cost for new-construction installs.

Architects should also consider fuel type. A gas-fired tank, for example, is ideal for whole-house use. The American Council for an Energy-Efficient Economy, a nonprofit advocacy group in Washington, D.C., also says gas-fired is more energy-efficient. Electric, on the other hand, is less effective in whole-house applications and, according to James Facer, a regional sales manager for Noritz America, better-suited to point-of-use applications such as a dedicated faucet. “The cost of operation [for an electric unit] is also higher,” he adds.

Richardson acknowledges that neither technology is perfect. “There is one drawback to tankless units: they need to be in a central location of the home,” she says. “But that goes for traditional hot water tanks, too, so it's not really a big deal.” Indeed. As much as possible, you'll want to shorten the water lines from the unit to the delivery point for better efficiency.

DOE describes an efficient setup as one in which the hot water uses are relatively close together, with short hot water lines between them. “One of the major costs in installation is the price of the vent,” Hitchner explains. You can reduce venting costs by locating the unit for the shortest runs, he says, adding that installing the unit outside is cheapest. Blatt says his firm does, in fact, favor a direct vent unit mounted on the exterior of the house.

Still, remember that even a large gas-fired unit can't supply enough hot water for multiple simultaneous uses in large houses. In those cases, multiple units work well—especially if they're set for dedicated areas that use a lot of hot water. Says Blatt, “Multiple smaller units are always better than one big unit.”