The invention discloses a network equivalence algorithm based on decomposition filtering. The algorithm comprises the steps that an initial value estimated by a recursion parameter is solved through voltage vector observation data and current vector observation data which are measured first time; UD decomposition is conducted on a matrix P by adding forgetting factors in a recursive least square algorithm; UD decomposition is conducted on P(k) in a recursive least square algorithm formula added with the forgetting factors, U(k) and D(k) are corrected in real time in the recursive process, but P(k) is not corrected, and then the nonnegative definiteness of P(k) can be guaranteed; Thevenin equivalent parameter estimation is conducted by applying a UD decomposition filtering algorithm added with the forgetting factors, and then network equivalence of a system is achieved. The network equivalence algorithm has the advantages that UD decomposition is conducted on the covariance matrix P in the recursive algorithm, therefore, correction on P in the recursive process is avoided, the nonnegative definiteness of the P is effectively guaranteed, and the numerical stability of parameter estimation is improved.