A heat pump water heater is like a refrigerator in reverse. Electricity is used to move heat from one place to another instead of generating heat directly. While a refrigerator moves heat from the inside of the box to the surrounding area in order to lower the temperature inside, a heat pump water heater pulls heat from the surrounding area and places it into a tank, at a higher temperature, to heat water. These systems typically have higher initial costs than conventional storage water heaters. However, because they are not generating heat directly, they have lower operating costs.
The Office of Energy Efficiency and Renewable Energy notes heat pump water heaters may save the average household almost $300 a year on its electric bills compared to a standard electric water heater, although some heat pump models are more energy-efficient than others.