Quite the topic on the home improvement forums these days. Will replacing your old tank water heater with a new tankless water heater lower your utility bills? In short, yes, but there's a lot more to the story!
A tankless water heater heats water as it's being used while a tank water heater heats water before it's needed. Simple physics dictates that it takes the same number of BTUs to heat water from 80 degrees to 120 degrees whether it's in a tank or on the way to your shower so a tankless water heater doesn't use any less energy to heat water than a tank unit. The savings happens between times of hot water usage when a tank unit continues to use energy to keep the water hot and ready while a tankless does not. Obviously, overall, a tankless unit uses less energy than a tank unit, but the questions become how much less and is it worth the additional price of a tankless unit to make the switch?
Since a tankless unit has only seconds to pump the required BTUs into the water as it passes through, it needs a gigantic energy delivery infrastruction. In other words, more juice and, for a gas unit, more ability to get rid of it's waste (Carbon Monoxide and water). The systems that were designed to deliver energy and carry away waste for a conventional tank water heater are not adequate for a tankless unit and must usually be totally replaced as part of the tankless install. In some cases this is a minor expense and in others it's huge. A home with 100 amp electrical service, for example, would need to have a service upgrade in order to accomodate an electric tankless water heater, many of which need at least half of the the 100 amps just to run one shower. The cost could be phenomenal. If the monthly utility savings doesn't pay for the additional unit and installation costs within a reasonable amount of time the change isn't worth while.
So, let's try an example: Purchase price, including installation, of a standard tank water heater is $600. Purchase price of a tankless unit including installation is $1000. Additional service and vent upgrades needed for the tankless total $300. The initial cost difference between tank and tankless is $700 (1300 minus 600). If the tankless unit saves $5 a month on the utility bill, the true savings will start in 140 months (700 divided by 5) or 11.6 years (140 divided by 12). Will you be in the house long enough to reap the reward? Is this a reasonable payback period? The choice is yours. Do the math for your situation and know that you're making an informed decision!
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