It is possible to completely eliminate standby heat losses from the tank and reduce energy consumption 20% to 30% with demand water heaters (also called flash water heaters or instantaneous water heaters), which do not have storage tanks. Cold water travels through a pipe into the unit, and either a gas burner or an electric element heats the water only when needed. With these systems, you never run out of hot water. But there is one potential drawback with demand water heaters— limited flow rate.

Typically, demand heaters provide hot water at a rate of 2 to 4 gallons (7.6 to 15.2 liters) per minute. This flow rate might suffice if your household does not use hot water at more than one location at the same time (e.g., showering and doing laundry simultaneously). To meet hot water demand when multiple faucets are being used, demand heaters can be installed in parallel sequence. Although gas-fired demand heaters tend to have higher flow rates than electric ones, they can waste energy even when no water is being heated if their pilot lights stay on. However, the amount of energy consumed by a pilot light is quite small.