If you want an energy-efficient replacement for an old tank water heater or if you have limited space for a tank heater, like in a cabin or condo, then going tankless can be a great option.  

Tankless, or on-demand water heaters operate on a simple principle: Heat water instantly and only when you need it.  It's a great tool for conserving energy in your home.  While more expensive up front, they generally last much longer than tank water heaters and only use energy when needed, not continuously.  Also, since water isn't sitting in a tank, it doesn't accumulate rust and scale build-up.

If you're ready to start shopping, here are three main points to consider:

Capacity (flow rate) - Tankless heaters typically produce between 3-8 gallons per minute (gpm) of hot water, depending on their size.  To determine the capacity you need, list the number of hot water devices you generally use at any one time. Then, add up their flow rates (gpm). For example, a flow-control showerhead uses ~2.5 gpm and an efficient washing machine uses 2-3 gpm.  Running both at the same time would use ~5 gpm of hot water, so that is the desired capacity you'd want.

To increase capacity, you can buy a whole-house, high-capacity heater, install two smaller parallel heaters, or install a small, dedicated heater for each high-gpm appliance, such as a laundry machine (single-point application).  Don't be scared of multiple units.  Remember, they only use energy when you use water.
 
Temperature rise - This is the number of degrees a heater can raise the water temperature at a given flow rate.   For starters, you need to consider the ambient temperature of the water coming into your home.  Let's say you want your hot water to be around 115° F.  A home in Minnesota in February will be drawing in much colder water from the ground than a home in southern Florida, so you'd need a greater temperature rise for each gpm to get comfortably hot water.  

Here is a basic example:  If your shower uses 2 gpm of hot water, the ambient temperature of your water is 55° F and you want a 115° shower, your tankless heater will need a 60° temperature rise at 2 gpm.  If you want to run the sink at the same time and the sink draws another gallon per minute, the heater must supply a temperature rise of 60° at 3 gpm, and so forth.

• Eco-tip: Look at the heater's spec sheet or the EneryGuide Label to determine its capacity + temperature rise (eg. 5.0 GPM at 35° rise).  Remember- A slower flow rate yields a higher temperature rise.  Appliances with an Energy Star rating are always a good choice.  Also, certain brands and models purchased in 2009 can qualify for a Tax Credit.

Gas vs. Electric - Consider the accessibility of a gas line or power outlet where you want your heater.  Also consider the relative installation costs for the different models.  Electric models are smaller, more efficient, have a longer service life and generally cost less to purchase and install than natural gas units.  Since they don't require venting, they can usually be placed much closer to the point of use.  However, electric models are very high power appliances. Consequently, a home may require a 200 AMP, 208 to 240 volt electrical service to run an electric heater. Many homes do not have such electrical power available and upgrades can sometimes be expensive.

While gas heaters are less efficient, natural gas is generally much cheaper that electricity, so they have much lower operating costs.  However, gas models require adequate venting since CO2 is released.  That can affect the installation process and cost.
 
Remember, this purchase will last you about 20 years if you choose wisely.  So go ahead and get into some hot water!  Both you and the planet will be glad you did.