Tankless Water Heaters or demand water heaters heat water directly without the use of a storage tank. Therefore, they avoid the standby heat losses associated with storage water heaters. When a hot water tap is turned on, cold water travels through a pipe into the unit. Either a gas burner or an electric element heats the water. As a result, demand water heaters deliver a constant supply of hot water. However, a demand water heater's output limits the flow rate.

Typically, demand water heaters provide hot water at a rate of 2–5 gallons (7.6–15.2 liters) per minute, and gas-fired models have a higher hot water output than electric models. They come in a variety of sizes for different applications, such as a whole building water heater, a hot water source for a remote bathroom or hot tub, or as a boiler to provide hot water for a heating system. Demand water heaters can also be used as a booster for dishwashers, washing machines, and a solar or wood-fired hot water system.

Demand water heaters may be installed centrally or at the point of use, depending on the amount of hot water required. The largest gas units, which may provide all the hot water needs of a small commercial building, are installed centrally, while a small electric unit acting a as a booster for a remote bathroom or laundry may be installed in a closet or under a sink.

source: US Department of Energy