By far the largest application of heat pumps in the South African commercial sector is in the heating of sanitary hot water in buildings like hotels, hospitals, prisons and residences at universities, technikons and schools. In most of these cases, heat pumps serve as an alternative to direct electrical resistance heaters. Heat pump water heaters (HPWHs) have, however, penetrated only 16% of the commercial water heater market in South Africa despite the fact that they consume about a third of the electricity required by resistance heaters. The reason for this is poor design practice, which leads to poor economics. This paper proposes an improved system integration methodology aimed at enhancing the potential impact of HPWHs with regard to energy consumption, peak electrical demand and the economic attractiveness to building owners. A simulation investigation is combined with results from a survey conducted on water heating in the commercial sector to illustrate the advantages posed by the new methodology. The new methodology entails combining an in-line heat pump and in-line auxiliary resistance heater with the correct control strategy while deliberately undersizing the heat pump. A procedure to determine the optimum heat pump size for such installations is also discussed. A case study is presented in which it is shown that for a typical installation the optimised design approach can lead to a reduction in the life-cycle cost by a factor of 2.4. (C) 2000 Elsevier Science Ltd. All rights reserved.