Blending diesel with biofuels, such as ethanol and palm oil methyl ester (PME), enhances the fuel properties and produces improved engine performance and low emissions. However, the presence of ethanol, which has a small cetane number and low heating value, reduces the fuel ignitability. This work aimed to study the effect of injection strategies, compression ratio (CR), and air intake temperature (Ti) modification on blend ignitability, combustion characteristics, and emissions. Moreover, the best composition of diesel–ethanol–PME blends and engine modification was selected. A simulation was also conducted using Converge CFD software based on a single-cylinder direct injection compression ignition Yanmar TF90 engine parameter. Diesel–ethanol–PME blends that consist of 10% ethanol with 40% PME (D50E10B40), D50E25B25, and D50E40B10 were selected and conducted on different injection strategies, compression ratios, and intake temperatures. The results show that shortening the injection duration and increasing the injected mass has no significant effect on ignition. Meanwhile, advancing the injection timing improves the ignitability but with weak ignition energy. Therefore, increasing the compression ratio and ambient temperature helps ignite the non-combustible blends due to the high temperature and pressure. This modification allowed the mixture to ignite with a minimum CR of 20 and Ti of 350 K. Thus, blending high ethanol contents in a diesel engine can be applied by advancing the injection, increasing the CR, and increasing the ambient temperature. From the emission comparison, the most suitable mixtures that can be operated in the engine without modification is D50E25B25, and the most appropriate modification on the engine is by increasing the ambient temperature at 350 K.