To mitigate disturbances to the electric grid resulting from the growing penetration of intermittent and decentralized renewable generation, a dual-source (air source and ground source) heat pump (DSHP) integrated with thermal energy storage (TES) was developed. The DSHP can use either ambient air or the shallow subsurface of the ground to provide space heating or space cooling to the building as the conventional heat pump and produce hot/cold water for charging TES. Using dual sources (air and ground) can reduce the required size of the expensive ground heat exchangers while retaining high energy efficiency. During the off-peak period, the DSHP cools/heats the TES with low-cost electricity or overproduced renewable power. The stored cooling/heating energy in the TES is released during peak hours of the electric grid to meet the thermal demands of the building without consuming electricity to run the DSHP. A 2-ton (7 kW) prototype DSHP was developed and integrated with a 50-gallon (189 L) TES tank filled with a phase change material. Field tests were conducted to characterize the performance of the integrated system operating in various operation modes.