Note: This post has been expanded and updated for 2009!
Tankless water heaters only heat water when it is needed. About 8% to 30% of the energy consumed by a standard water heater goes to keeping the water hot while it’s not being used. New tankless systems heat the water instantly when you turn on the faucet, rather than keeping a tank full of hot water 24/7 whether you’re using it or not. Tankless heaters run on either electricity or gas, just like regular heaters. They start out at about $300 for electric and $600 for gas.
The online store Low Energy Systems has a good selection of tankless water heaters, both electric and gas-powered. You can also find tankless water heaters reviewed on Amazon–this is one of the few places you’ll find reviews from owners themselves.
See more information about water heaters and electrical savings at Ask Mr. Electricity