This paper reports the optimization of,I ground or water source heat pump system for housing applications with respect to the best exergy performance and maximum environmental exergy potential use. The analysis presented also offers the Opportunity of exploring a new objective for the optimization Or the use Or exergy sources: In any system powered by ail external exergy source optimization is achieved when the exergy flux to the environment is minimum under the existing constraints'. This corresponds to utilizing the Supplied exergy to overcome the total irreversibilities of Such a system only. The environmental exergy utilization and the exergy Output to the environment are analyzed in connection with this objective. Copyright (C) 2008 John Wiley & Sons, Ltd.