I think the cold water goes on the bottom and passes over a simple coiled heating element that works in a similar way to the one in an electric kettle.
Simple physics, the heater is normally rated between 8.5 – 10.5kW and at the water flow rate it is heated from circa 20⁰C to 45⁰C; the heater tank has a volume of less than one litre, leading to heated output water in a very short time from first switch on.
It's 'brute force' really, Sandy. A small copper tank containing a heating element and a restricted flow of cold water. Such a small amout of water passing over, in some cases, a 10kw element. In old money, think of 10 bars of an electric fire all on at once.
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