Thermal energy storage using the latent heat of phase change materials (PCMs) is a promising technique to solve the time mismatch between the availability and usage of flue gas heat in distributed generation systems (DGSs). A diesel-engine-powered DGS integrated with two-stage tube-type PCM modules for exhaust gas heat recovery was developed and studied. Energy and exergy analysis for the PCM storage unit was carried out to verify the effectiveness of the PCM modules for heat recovery and to highlight the merits of the cascaded configuration through a practical engineering case. Furthermore, the performance of the DGS was evaluated to study the contribution of PCM storage to improving system efficiency. The results showed that 56.4% energy and 48.3% exergy of the input flue gas were stored by the two-stage storage unit. Additional integration of the low-temperature PCM module to the high-temperature module improved the average storage efficiency from 33.6% to 62.3% for energy and 33.1% to 50.8% for exergy. By utilizing the stored energy for heating water, the thermal efficiency of the diesel engine was increased from the original 35.8% to 41.9%, while the exergy efficiency was improved from 29.5% to 29.7%.