It might work without plugging in the iPhone, but I imagine most times it would be plugged, overnight or whatever.
This is honestly a pretty great feature, and actually makes me more likely to buy an Apple Watch. I don't want to have to bring another charge cable with me, and now I wouldn't have to. I wonder what the charge speed is though — I wouldn't want to have to charge it overnight.
EDIT: Thanks for clarifying, it took me a while to understand based on what they had said and what Ars reported. I can see that it's just the same as how you can plug any peripheral into an iPad and charge off its battery. Now you can do the same with iPhone...big deal.