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Heat pump water heaters are considerably more energy efficient than electric resistance water heaters, and with coming efficiency requirement changes they are likely to begin gaining market share. However, one disadvantage of current heat pump water heaters is that it is unclear how they may provide demand response and ancillary service functionality to utilities, who often wish to increase or modulate load for a variety of purposes. This paper describes a prototype heat pump water heater in a new configuration, which may provide improved energy efficiency as well as a simple method for integrating electric resistance element heating in an efficient way. Initial laboratory testing of the prototype system is shown, with promising results for both efficiency and demand response functionality.