When a hot water tap is turned on, water enters the tankless water heater. A sensor detects the water flow, and activates a gas heating device, which quickly raises the water temperature to a preset level. When water flow stops, the heating device shuts off. Thermostatically-controlled tankless water heaters vary their output temperature according to water flow rate and inlet water temperature.

Unlike traditional storage tank water heaters, tankless water heaters do not store a reservoir of hot water. As a result, standby losses are reduced, which makes them an energy-efficient alternative to traditional water heating.