Tankless water heaters, also known as “on demand” or instantaneous water heaters, have been all the rage in home improvement circles in recent years with manufacturers billing them as big energy savers.

They sound like a great green idea. They’ve been popular in Europe and Japan for ages. They save space and can be mounted to the exterior of your house for easy venting.

They heat only the water you use, which means you should never run out of hot water. Conventional tank water heaters, which typically hold 60 gallons of water or more, require off-and-on heating as well as large insulated tanks to maintain a substantial hot water supply.

While online reviews of tankless water heaters’ efficiency have been mixed, I recently heard from Cathy Miller of Arlington who said her family’s new Bosch AquaStar tankless water heater has almost cut their PUD bill in half since she had it installed about a year and half ago.

“It’s just wonderful,” said Miller, who lives with her husband and son. “It’s amazing. I knew we could save money. I’ve been begging my husband to do it. He kept complaining about the power bill.”

Residential water heating is typically the second largest use of energy in American homes, according to Bosch.

Miller said the family can run both showers, the dishwasher and the washing machine all at once and still not run out of hot water in their single-wide mobile home, where they now have an extra closet where their old water tank used to live. Their tiny tankless water heater, which cost about $900, is mounted on the back of the house.

Their heat source is propane.

“The cost of propane is minimal because it only fires up when you’re using the hot water. It goes across these little copper coils,” she said. “It comes in cold and comes out boiling.”

If you want to get in on the water heater game and other energy-efficiency improvements, your household could be eligible for up to a $500 tax credit if you invest in improvements by Dec. 31. (The Energy Policy Act of 2005 officially ends with the 2006-2007 tax year and 2008 isn’t likely to bring similar benefits, according to my eco-sources. Bummer.) Read about the soon-to-expire tax credit options here or study up on tankless water heaters from major manufacturers such as Bosch, Takagi, Rinnai and Rheem.

Here’s to doing more now and in the new year to save energy at home.

I’ll see you in 2008!