In this article, the authors elaborate the theory and application of the state projection estimation error (SP2E) method. SP2E has been developed to efficiently localize structural damage. The authors begin by discussing some estimation techniques for damage identification. Because exact analytical mechanical parameters and structural excitations are often unknown for real large-scale structures, the parametrization of a mechanical system by stochastic subspace identification is considered. This leads to discrete-time state space parameters and is the basis for ∞ estimation, which allows to cope with unknown structural excitations. For damage localization, we applied SP2E and compared the result afterwards to a defined difference process. This led to the proposed damage identification procedure, which finally is applied in real laboratory experiments. Based on a discussion of different estimation techniques and their numerical application, the experimental results confirm the method SP2E. KEYWORDS damage localization, H-infinity estimation, oblique projections in linear algebra, output only identification, structural health monitoring Struct Control Health Monit. 2018;25:e2237.wileyonlinelibrary.com/journal/stc