In your home, water heating can account for 13 to 25% of your energy consumption. There are a variety of ways to lower the impact and cost of your water heater, such as turning down the thermostat on your water heater when you go out of town or installing a recirculation pump. Another good option for long-term savings is replacing an old storage water heater with a tankless (or demand) water heater. Tankless water heaters are just that - tankless. They are able to avoid standby heat losses that come with storage water heaters because they heat the water as you need it. When you turn on a hot water tap, cold water goes through a pipe into the water heater where it is heated by either a gas buner or an electric element. You never need to wait for a storage tank to fill before you can take your hot shower. In fact, tankless water heaters deliver an infinite supply of hot water (which means you need to be careful that your 5 minute morning shower doesn't turn into a 20 minute hot water extravaganza).
Tankless units do limit the flow rate of hot water. Most units produce hot water at a rate of 2 to 5 gallons per minute. Be aware of these limits when choosing a new water heater. If you have a large household and expect to have multiple simultaneous uses of hot water, even the largest tankless water heater might not work for you (in this situation, if you really want to go tankless, consider installing more than one unit to deal with simultaneous demands). As such, tankless water heaters have proven to save more energy in households that demand less hot water. According to the U.S. Department of Energy,
"For homes that use 41 gallons or less of hot water daily, demand water heaters can be 24%–34% more energy efficient than conventional storage tank water heaters. They can be 8%–14% more energy efficient for homes that use a lot of hot water — around 86 gallons per day. You can achieve even greater energy savings of 27%–50% if you install a demand water heater at each hot water outlet."
So if you're looking to cut down your energy consumption when it comes to hot water, tankless might be for you! But definitely remember to think about your water consumption. Just because you have a constant supply of hot water doesn't mean you have to use it constantly.