"How It Works — Whole-Home Gas Tankless Water Heaters

Whole-home gas tankless water heaters apply the same principle to heat water as standard gas water heaters, but without a storage tank. They save energy by heating water only when needed, eliminating energy lost during standby operation. When a hot water tap is turned on in the home, cold water is drawn into the water heater. A flow sensor activates the gas burner, which warms the heat exchanger. Incoming cold water encircles the heat exchanger and leaves the heater at its set-point temperature. Combustion gases safely exit through a dedicated, sealed vent system. By heating water only when needed, instead of maintaining a tank full of hot water at all times, tankless water heaters can achieve greater efficiency than standard tank-type water heaters.

An ENERGY STAR certified gas tankless water heater uses a secondary heat exchanger to use 9 percent less energy than a conventional gas tankless water heater. The secondary heat exchanger extracts more heat from the combustion gas, cooling it to the point where there is condensation – hence these types of heaters are called “gas condensing.” These gas condensing tankless water heaters, like gas condensing furnaces, require venting through a vertical PVC pipe and a condensate drain."

-Energy Star