All water heaters work by heat exchangers--devices to transfer heat from a hotter area to a cooler one. In a gas heater, hot gasses flow through tubes either directly under the water tank or through it, letting the heat leak into the water. In an electric heater, a heating element transfers heat from a resister directly into the water. In an indirect water heater, water from a hotter source is used in the heat exchanger.
How an Indirect Water Heater Works
Extremely hot water--water too hot to use for washing--is pumped in a tube through a water tank. Usually, the tube coils around and around inside the tank. As the water flows through the tube, more and more of its heat flows out into the water. The tube with cooler water then flows back to its own heater, where it is heated again.
Indirect Heater Drawbacks
When you heat water, a little bit of heat is lost and wasted. When that water flows into another tank of water to heat it, more energy leaks out and is wasted. This makes indirect heating less efficient than directly heating water. this means it is only practical in certain situations. Often, indirect heaters are used in buildings that use boilers to produce steam for heat. Since those boilers are already producing a lot of extremely hot steam, it is efficient to hook an indirect heater into the system. Another common use of indirect heaters is with solar water. Many solar water heaters are compact, heating a single tube of water or antifreeze to a very high temperature instead of heating a whole tank. That water can then be pumped into to a central heating tank to heat enough water for the whole house.