The hot water tank in your home is a large consumer (and waster) of energy, whether you heat your water with electricity or natural gas. That huge tank of water is kept hot all day long, whether you are using it or not. Even an insulated tank will lose heat, requiring a constant input of energy to keep the temperature up.

But, there is an alternative to the traditional hot water tank. They are called on-demand water heaters, or tankless water heaters. Your water is heated as you need it, eliminating the constant energy drain all day long. Not only do they use less energy, they take up far less space than a standard tank. A good choice for smaller homes with limited space. These types of water heaters are fairly common in Europe and Japan.

These systems use less energy overall, but they do have a higher draw during use due to the speed at which the water is heated. This draw needs to be accounted for during installation, with larger gas lines or heavier electrical connections. Gas models will need to be vented outdoors as well.

Now, these are not ideal systems for all circumstances. It takes a little longer to get water heated, and a tankless water heater can only handle so much simultaneous output (depending on the size of the unit). So doing a load of wash, while taking a hot shower might not be a good idea. A household of several adults (or teenagers!) would probably not be happy with this sort of hot water system, whereas a smaller family would be fine. I live by myself with a toddler, and seriously considering replacing my own hot water tank with a gas tankless system.

Manufacturers of Tankless Water Heaters
SETS
Takagi
Bosch