After fading away in the U.S. market for nearly 50 years, tankless heaters started cropping up again in the 1970s.

Tankless water heating systems have been around for more than a century. Long popular in Europe and Japan, these systems got off to a rocky start in the U.S. market and their early bad reputation dogs them in some circles to this day. Now, sporting new onboard computers, tankless water heating systems have quietly captured a tiny part of the U.S. water heater market and some say they're poised to make their presence known in a big way.

Beginnings

A Mr. Maughan it seems invented the first instant heater in England in the 1870s. Later, Edwin Ruud, with patents in the 1890s, took the idea with his own modifications and brought it to the U.S. "Several years ago I found a correspondence from 1898 that touted a tankless water heater from an American company," says Aaron Siegel, vice president of sales and marketing for Eemax. "I don't know what the technology was-it may have been some kind of boiler-but it was billed as a tankless water heater. It's an invoice from a company called The Tankless Water Heater Co. in New York. It's a little humbling, really. You think you're on the cutting edge and the idea that some semblance of the technology was around in those days is eye-opening."

After fading away in the U.S. market for nearly 50 years, tankless heaters started cropping up again during the 1970s, mostly from companies like Paloma, Controlled Energy Corporation and Thermar. The 1980s saw the marriage of the tankless water heater with the microchip, which is used to control temperature, and a market segment was born.

"Junkers, which is a Bosch company now, has been making them since before World War II. I know that Ruud made a form of an instantaneous water heater back in the 1930s," says Kyle Murray, marketing vice president at Controlled Energy Corp., a Bosch affiliate in Waitsfield, Vt. "There was a company called the Pittsburgh Water Heater Co. that did an instantaneous water heater. I believe they've been in existence for well over 75 years. The first European and Asian products came in the 1970s."

And there were others like, American, Hoffman, Holyoke, Hotstream, Humphrey, Instantaneous, Lawler, Lawson, Monarch, Rapid, Sands, Troop and Victor.

At Takagi USA in Irvine, Calif., vice president Ted Kwak says his company has been manufacturing tankless heaters in Japan since 1950, bringing units like the T-M1, T-K2 and other natural gas and LPG-operated units to the U.S. market in 1995: "Tankless water heaters were made in the U.S. 40 or 50 years ago," Kwak says. "Basically the tankless water heater came from the boiler industry because a boiler is the same concept as a tankless water heater."

The Market

Even though tankless heaters have been around that long and available in the U.S. for nearly 30 years, they currently make up a miniscule part of the U.S. market. Early units, experts say, were the root cause of the slow initial growth-they developed bad reputations for low flow and temperature control that was spotty at best.

The size of the U.S. water heater market-both in dollars and units sold annually-varies depending on who's talking. Likewise, the market penetration estimates for tankless heaters vary from between 3 and 5 percent of the total. But the consensus is the market's on a positive growth trend.

At Stiebel Eltron in Holyoke, Mass., President Frank Stiebel estimates the size of the U.S. tank-type water heater market to be 9 million units annually. Stiebel Eltron launched in Germany in 1924 and began manufacturing its electric heaters for that market in the early 1950s.

"We've manufactured more than 10 million electric water heaters since then," Stiebel says. "We started selling our units in the U.S. about 8 years ago." As for U.S. sales, Stiebel says the numbers are, "rapidly rising."

"We've really concentrated on point-of-use applications for commercial and industrial installations for hand-washing and kitchens. We're basically competing with smaller, tank-type units," Stiebel says. "We have concentrated on commercial and industrial applications because that is traditionally the market for electric tankless water heaters and that's all we make."

CEC's Murray estimates the U.S. market to be about 10 million units and $2 billion annually. Tankless penetration for products like Bosch's Hydro 125 gas units was less than 1 percent as recently as two years ago but it's grown: "All tankless combined, according to my market research based on import data and, if you take electric and gas instantaneous together, is less than 3 percent. But it's growing rapidly."

Steven Cavanaugh, sales manager for Envirotech Systems Worldwide Inc., in Scottsdale, Ariz., which offers electric tankless systems like the ESI 2000 for residential and industrial applications, estimates the overall market to be $3.5 billion annually.

"Nobody knows how much of that is tankless, but it hasn't even begun to scratch the surface yet. Tankless is definitely making headway," Cavanaugh says. "We feel America is going to go tankless-there are lots of reasons to do it."

The Digital '80s

Early tankless units never fired the American imagination, primarily because they weren't able to properly maintain temperature or flow when multiple faucets were being used at once: "There were some pretty junky units that came out early on and that probably gave the industry a bad name," Murray says.

That perception remains today, according to Peter Dittler, owner of Peter Dittler Plumbing in Santa Cruz, Calif. Dittler's been in the business for 30 years and has installed various tankless systems for the past decade.

"The first thing I would tell my customer is that they're used to a bigger shower and that I can't guarantee they're going to get as vigorous a shower with the tankless," Dittler says. "The smaller the tankless system, the less volume you'll get."

However, manufacturers say, one factor contributing to growth is the incorporation of microprocessor temperature control. This came about during the 1980s and allows the user to program the unit to heat water to a predetermined level for use instead of having to mix "overheated" water from a tank system-as hot as 120 degrees F or more-with cold water to ready it for use. The consumer will see energy savings since it's on-demand, manufacturers say.

"But, even today, some electric heaters draw their maximum amount of power once the water comes on. Ours is microprocessor-controlled so they only draw the current they need to heat the water to the set temperature," Cavanaugh says. "They'll tell you the temperature of the water going into the heater, the temperature in each chamber, and the temperature going out of the heater and exactly how many gallons per minute are going through it."

In addition, Cavanaugh says, the heater constantly checks itself. This means if you're taking a shower and somebody turns on another one the heater will realize instantly that more water is coming through and will tell the heating elements to get hotter to maintain the temperature.

Bruce Boston, a marketing spokesman for Takagi USA, says the past five or six years have seen the biggest improvements in microprocessor-controlled tankless heaters: "Now we have multiple sensors. The T-K2 has a temperature sensor on the inlet and the outlet," Boston says. "The gas valves are highly variable and even the fan that adds oxygen to the fire is variable and is linked to the computer."

Today's Tankless Systems

Like their tanked cousins, today's tankless heaters are offered in both gas and electric models. But each type has its place-even electric unit manufacturers will note this type may not be the best setup for a residential application because they can put a heavy load on a home's system. Murray, who notes the water heater split in the U.S. is about 50:50 gas vs. electric, says CEC offers both gas and electric models but gas models make up the company's primary residential business.

"The electric instantaneous, as a whole-house unit, has some very big limitations. In order to get the output for a U.S. household from an electric instantaneous you're probably looking at 120 to 160 amps of service," he says. "Many houses only have 200 amps in the whole thing. From the standpoint of usage and what's good for the environment, gas definitely has the advantage."

He notes environmentally conscious consumers may be more satisfied with a gas unit because making electricity is a dirty business: "Most of the electrical generating plants are using dirty technology and they're going to get dirtier since they just rescinded some of the Clean Air acts of the 1990s," he says. "Most of the electricity is produced from old, coal-burning plants and there's very limited nuclear technology. Water heating by electricity means we have to generate more power. Gas is a cleaner way to go."

And, perhaps, more efficient in the long run. Even though there have been great efficiency strides made in the world of tanked water heaters, there are still issues. Energy can be wasted because water in the tank is kept heated. When it's not being used it cools down only to be heated again. This cool down cycle is called standby heat loss. The American Council for an Energy-Efficient Economy in Washington, D.C., says it's possible to completely eliminate standby heat loss and reduce energy consumption by as much as 30 percent with tankless water heaters.

Takagi USA's Boston says his company's gas units post efficiency numbers between 82 and 85 percent while tank heaters are in the 45 to 55 percent efficiency range.

"Electric has a higher efficiency rate versus gas in both tanked and instantaneous heaters. They can be as high as 98 percent efficiency, but the main difference there is the cost of electricity," Boston says. "You look at the actual cost of operation and the gas, at 85 percent efficiency, is still more economical than electric at 98 percent. And one thing plumbers don't like is electricity. Usually that's an electrician's job."

That could be why Stiebel Eltron has not pursued the commercial market with its line of electric heaters until recently. If you're in an office building or a mall and you need hot water for hand washing, you don't want to put in a gas heater because then you need a flue or chimney.

"If you're in the middle of a building somewhere that's not going to work. I think the gas units will probably be more prevalent in homes because gas is a little cheaper," Stiebel says. "I think there'll be slightly more gas units in residential applications. Having said that, electric is a huge market-we're coming out with a whole house heater that's going to be available in January. That will be a whole new territory for us in the U.S. market."

Other Issues

A couple of developments at the federal level are contributing to the growth of the market. The first is a reduction in flow mandated by water conservation laws in the 1990s. The second are new federal safety standards designed to make residential tanked water heaters less likely to ignite flammable vapors. These are being developed in the wake of a series of fires linked to water heaters as the point of ignition. The new standards are tentatively scheduled to go into effect in 2003.

"If someone spilled gasoline someplace and the vapors came up they will ignite if there is a source of ignition nearby," says Frank Stanonik, chief technical adviser for the Gas Appliance Manufacturers Association in Arlington, Va. "Now the water heater will have to be designed so it won't light flammable vapors. As far as how much it's going to add to the cost of the water heaters, I don't know."

Stanonik says the new standards won't carry the weight of federal law because compliance is voluntary. However, the reality is products will have to meet those standards if manufacturers want to sell them.

The new standards come from a committee accredited by the American National Standards Institute called the Accredited Standards Committee Z21/83. It's made up of what Stanonik calls, "interested parties" and it deals with, "consensus standards development," whereby these interested parties develop standards for products, in this case, tanked water heaters. Both Cavanuagh and Murray speculate the new standards could increase the cost of a new tanked water heater by as much as 25 percent, making tankless "sticker shock" less of an issue for consumers.

On the mandatory low-flow fixture side of the coin, showerheads now have to flow 2.5 gpm or less and, in commercial applications, faucets have to be 1/2 gpm or less. This helps make tankless heaters more efficient, manufacturers say. Reduced flow rates simply mean the less water that's flowing through a system, the easier it is to heat-a boon for the tankless heaters' efficiency since they only use energy on demand.

"The largest showerhead you can buy right now is 2.5 gpm. The less hot water is going through the less power the heater will draw. Our heaters will draw, maybe, 10 or 15 amps," Cavanaugh says. "Electric tank heaters will draw 30 or 40 amps because you fill the tank and it comes on. Our heaters will draw next to nothing because you're only heating up what you're using. A tank heater can take from 45 minutes to an hour and a half to recover their heat."

Stiebel agrees a controlled flow rate helps tankless heaters perform because he says the tankless concept only works if the flow is controlled: "You can't have crazy flow rates. If somebody has a huge hot tub, that will be tough to do with a tankless system," he says, adding Stiebel Eltron supplies specially designed aerators to be used in conjunction with its units so the system's flow rate matches the output of the heater.

Expanding Through Education

There are going to have to be a lot more tankless installations completed in residential applications before contractors will make any money off them, according to Dittler. And he's not sold on the "pay for itself" theory, either: "You can do the numbers and talk to other people," he says. "It's going to cost consumers more because it's going to cost them more to buy them. It all depends on what your savings are on fuel."

Most manufacturers advertise, both in trade publications and direct to the consumer. Murray says his company's tankless products have been featured on television programs like "This Old House" and "The Today Show." He says CEC has experienced a pop in sales shortly after the product appears in the media because, "when people are made aware of the product they think it's a great idea," he says. "Most people don't know it exists." And manufacturers like Takagi USA and CEC offer training programs for contractors. That's critical, manufacturers say, because contractors tend to be "Show Me" people by nature. Boston says one way Takagi USA shows contractors the benefits of tankless is via happy customers.

"If we can just convince the plumber to put it in, the consumer will go back and say they love the thing. That's when the plumber gets convinced. Another thing to consider is that the higher the ticket, the higher the profit. We've done a lot to support contractors, as well," he says. "Not a lot of tankless water heaters are going direct to consumers, we take those consumer leads and we give them directly to our plumbers. The plumber can go in and build a relationship by installing the Takagi and now he's that persons' plumber."

Dittler remains skeptical: "I know there's an awful lot of promotional work going on and I know a lot of people are enamored of it. I'm more cautious-I want to see the other contractors make the mistakes and have unhappy people," he says. "I guess there's a satisfaction there from knowing you're living lighter on the planet and that's something the manufacturers want to sell."

So do contractors stand to make more money replacing failed tank heaters or by retrofitting existing homes? Well, tankless heaters cost more going in the door, but the experts say it's cheaper to install them in new construction because they're wall-mounted and don't require pedestals. "People don't realize how much that little square area for a tank water heater actually costs them," Cavanaugh says. "A tankless heater is up on the wall, not on the floor, so it frees up space."

Murray says the best scenarios for a retrofit are either gas-to-gas or electric-to-electric. Amperage draw is still an issue when replacing an electric tanked heater with a tankless unit. On the gas side, additional work could take the form of increasing the gas line diameter and adding a larger vent.

Moving Ahead

Better technology, a fortuitous federal mandate or two and heightened awareness among contractors and consumers have combined to take the tankless market from virtually nothing to owning a somewhat more substantial, though estimated, 3 to 10 percent of the U.S. water heater market. That's pretty impressive since it could be plausibly argued the systems, in their new and improved form, have been a credible alternative only for the past decade. Manufacturers, obviously, are pinning their hopes on continued substantial growth.

Kwak speculates the tankless market will grow to 30 percent of the total U.S. market over the next five years, with the retrofit market being much larger than the new construction market. Stiebel is a little more conservative.

"I think it's going to be a lot bigger than it is today. A lot of gas units used in homes will be instantaneous-not the tank type. I don't know what the percentage will be but maybe it will be approaching 20 percent," he says. "There will be a sizeable amount of tankless units on the electric side as well."