SUMMARY Higher heat loss is one of the major problems in indirect injection diesel engine, which can be overcome by means of low heat rejection (LHR) concept. For this purpose, at the present work, piston and liner of the main chamber engine are insulated. Energy analyses for baseline and LHR engine cases are carried out during a closed engine cycle using a computational fluid dynamics code. Also, exergy analyses for these cases are carried out by a developed in‐house computational code. The numerical analyses are carried out at four different loads (25%, 50%, 75%, and 100%) and in maximum torque engine speed of 730 rpm. The numerical results of pressure in cylinder for baseline engine at 50 and 100% load operations are compared with the corresponding experimental data and achieved a good agreement. The comparison of the results for two cases shows that when the load increases from 25% to 100% (in 25% increments), heat loss exergy decreases by 68.73%, 80.24%,91.38%, and 74.97% respectively in LHR engine in comparison to baseline engine. Also, exergy efficiency increases by 17.2%, 12.4%, 6.07%, and 11.81% respectively in LHR engine. Copyright © 2013 John Wiley & Sons, Ltd.