THE CURRENT TOOL for water heating is a large, space-hogging tank that is good at producing hot H2O but has a tendency to run out when you need it most. Until a depleted hot water tank is given time to heat more water, it is largely useless. But there is hope for the future: on-demand tankless water heaters.

The growing interest in energy conservation and the demand for more energy-efficient products are making tankless water heaters the next, uh, hot thing. “Not only do tankless water heaters provide an efficient source for heating water, they also increase the lifestyle benefits for the homeowner by never running out of hot water,” says Robert Kirkpatrick, national sales manager for tank producer Rinnai Corp. in Peachtree City, Ga.

A small, suitcase-sized unit that sits on the wall, the tankless water heater goes to work only when it is needed, providing an energy cost savings of up to 70 percent on monthly utility bills, Rinnai says. No wonder Kirkpatrick expects the category to continue experiencing double-digit growth in the coming year. And good news—the Energy Policy Act of 2005 has a provision that gives homeowners a $300 tax credit for installing a tankless unit. Builders do not receive a tax credit for installing a unit, but they do get other benefits.