We recently installed a tankless hot water heater on our home in Denver's Chaffee Park neighborhood, and although we love it's hot water capabilities, compact size and about $70/year in energy savings, I'm not convinced it's the right decision for everyone. Let me explain a bit more. A tankless water heater differs from a storage type because it doesn't hold hot water, rather when someone requires hot water high powered burners heat it on demand.
Although you'll never run out (think start the dishwasher, run a load of laundry and then take a well deserved hot bath), these type of water heaters can cost around $1000, and about the same to install because they require special venting and electrical changes; whereas a higher end replacement storage type may cost $450 and only $300 to install.
Even 20 years of energy savings is barely enough to recoup a higher initial investment. My recommendation for cost effective water heating? When replacing, simply replace with a 9-12 year warranty storage type water heater. These typically have more insulation, bigger burners and better working parts, then set it as low as you can comfortably handle.
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