Water fuel emulsion has been widely studied with the advantages of saving energy, enhancing engine torque, improving engine performance, and reducing the pollutant emissions. However, it has unfavorable disadvantages such as phase separation and long ignition delay. Water fuel microemulsion with rhamnolipid as the surfactant was formed in this study and characterized in comparison to water fuel emulsion. Water fuel microemulsion was thermodynamically stable without phase separation after 90days vs. the milky-white emulsion fuel, separated within 2days. In the thermogravimetric analysis, the TG and DTG curves were shifted to higher temperatures as the increment of heating rate. However, the shift for emulsion at 40Kmin−1 was inconspicuous, which implies the reduction in heat transfer, mass transfer, and vaporization rates and further the lengthened ignition delay upon combustion in diesel engine. The activation energies (Ea) predicted by Ozawa–Flynn–Wall (OFW), Kissinger–Akhira–Sunose (KAS), and Starink’s methods indicate that the formation of microemulsion could decrease the activation energy of the fuel by about 5kJmol−1, while the formation of emulsion would increase by 15kJmol−1. The lower activation energy of microemulsion fuel is an indication of easy ignition or shortened ignition delay. Thus, microemulsification may be a more competitive technique for fuel upgrading compared to emulsification.