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.