Stretchable thermoelectric generators (S-TEGs) have the potential to utilize waste heat from sources with complex and dynamic surfaces. However, their thermoelectric performances are still lower than those of conventional hard and rigid TEGs and are easily degraded by large or cyclic deformations due to electrical failure. An approach that improves both stretchability and thermoelectric performance is required. This study presents and explores the improvements enabled by an ultrasoft silicone sponge encapsulation for S-TEGs using silicone-encapsulated serpentine interconnects for the internal electrical wiring of the bismuth-telluride-based thermoelectric elements. The ultrasoft silicone sponge is characterized by a low Young’s modulus (0.01 MPa) and low thermal conductivity (0.08 W m−1 K−1) owing to its open-cell structure. We consider that the low Young’s modulus decreases the internal stress in the interconnects under deformation and that the low thermal conductivity increases the temperature differences in the thermoelectric elements under constant heat flow conditions. We fabricated S-TEGs with three different silicone encapsulations: hard and soft silicones, as used in previous studies, and an ultrasoft silicone sponge. We experimentally measured the elongation and cycle number to failure for stretchability evaluation as well as the open-circuit voltage and maximum power for thermoelectric performance evaluation. Thus, the S-TEG with the ultrasoft silicone sponge encapsulation showed both the highest stretchability (125% elongation to failure) and thermoelectric performance (1.80 μW cm−2 maximum power per unit area on a heater at 100 °C under natural air convection). Additionally, the S-TEG showed 153 μW cm−2 maximum power per unit area on a heater at 100 °C under water cooling, and comparisons with existing S-TEGs confirm that the proposed S-TEG achieves improved stretchability and relatively high output power.