Heat pump water heaters use electricity to move heat from one place to another instead of generating heat directly. Therefore, they can be two to three times more energy efficient than conventional electric resistance water heaters. To move the heat, heat pumps work like a refrigerator in reverse.

A fan pulls the ambient, warm air from wherever the heat pump is located (a basement, utility room or garage), and blows it across a series of refrigerant-filled evaporator coils. The slightly warm refrigerant is pumped through a compressor to increase the pressure and temperature before being passed through condenser coils that are wrapped around, or pass inside of, a water tank. The hot refrigerant passes its heat to the water, cools off and then returns to the evaporator coils where it starts its journey again, collecting warm ambient air.