The internal combustion engines waste large amounts of heat energy, which account for 60% of the fuel energy. If this heat energy could be converted to the output power of engines, their thermal efficiency could be improved.The thermal efficiency of the Otto cycle increases as the compression ratio and the ratio of specific heat increase. If high octane number fuel is used in engines, their thermal efficiency could be improved. Moreover, thermal efficiency could be improved further if fuel could be combusted in dilute condition.Therefore, exhaust heat recovery, high compression combustion, and lean combustion are important methods of improving the thermal efficiency of SI engines.These three methods could be combined by using hydrous ethanol as fuel. Exhaust heat can be recovered by the steam reforming of hydrous ethanol. The reformed gas including hydrogen can be combusted in dilute condition. In addition, it is cooled by directly injecting hydrous ethanol into the engine. In other words, it is possible to burn at a high compression ratio.Hydrous ethanol can be efficiently converted from biomass during refinement because the energy during distillation can be reduced.Using hydrous ethanol is effective from both perspectives of refining and using it.We examined improvements to thermal efficiency by using hydrous ethanol that was reformed in SI engine. The thermal efficiency of these systems is 1.5 times that of conventional SI engines from calculations. The thermal efficiency of these systems in test engines is 1.18 times that of conventional SI engines.