A heat pump water heater pulls heat from the air around it and transfers that heat to the water. It looks similar to a traditional water heater, with the heat pump component at the top. Because it moves heat rather than generating it, it uses far less electricity than a standard electric water heater.
It works best in areas with plenty of air, like a basement or utility room. In tighter spaces, it requires ventilation. As it works, it slightly cools and dehumidifies the space around it.
