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At present, most methods of arc suppression coil compensation work base on the detection of post-fault distributed capacitance current, which cannot offer sufficient compensation current to the system with larger distributed capacitance current. The paper proposed a new approach that achieves automatic arc suppression coil compensation and earth fault detection based on signal injection, which can offer the accurate measurements of distributed capacitance and then adjust the arc suppression coil according to pre-determined compensation degree in the normal. The system would obtain ideal compensation effect by following the change of distributed capacitance in transient fault. It can also achieve fault line selection and fault location of single-phase earth fault by the same way.