A heat pump is essentially a special type of air conditioner that is reversible. In a normal air conditioner, coolant absorbs heat in an indoor evaporator coil, where it is pumped to an outdoor unit and condensed, releasing heat. A heat pump can reverse this cycle, releasing heat indoors instead.
Since a heat pump does not burn fuel to warm a home, it is more energy efficient than a gas or electric furnace. However, extremely cold temperatures can reduce a heat pump's effectiveness, leaving it struggling to create heat in the condenser cycle for release indoors. Some heat pump units draw heat from the ground in addition to the ambient air, but even these can lose effectiveness in extremely cold climates.
Some heat pumps use water as the medium for transferring heat. Typically, these units contain an insulated tank that heats or cools accordingly. The system can pump heat from the tank into the home or heat from the home into the tank. In addition, some of these models feature the ability to pump heated water underneath the floorboards of a home, creating a whole-house warming effect as heat rises throughout each room. These units are much more expensive to install than a standard heat pump, however, since extensive plumbing is required.