In this paper a new method based on multiresolution analysis of wavelet transform is presented to distinguish the inrush current and internal faults with the ratio of energy change rate as the criterion. This algorithm is called the wavelet energy method. This research uses SIMULINK to build simulation models of inrush current and shortcircuit current to get waveforms of them. The high frequency coefficients of the two are extracted by wavelet toolbox, and the energy of each scale is obtained. Simulation results show that the method is simple,convenient and it is capable to distinguish inrush current and shortcircuit currents effectively.