i think there are a few things.
- the world is static and it's huge. so you can always go to the same towns & the same dungeons.  helps with the atmosphere, it actually feels like you travel far to remote locations and go deep underground (cause you do)
- there are lots of parts used and more variation than you'd think.  for dungeons there's quite a bit of variation, different sections can have flooded/partially flooded/dry versions.  so you rarely see exactly the same thing twice.  same goes for towns.  you will recognize sections but besides that there are really a lot of individual variations.  if you use a program like daggerfall explorer you can browse all the components of the game.  it's really quite varied.
- there are also lots of quest templates (more than 1 hundred?) that each offer lots of possibilities since you can have an almost unlimited number of combinations of person/item/locations.
- its unpredictable and glitchy.  there are some things you know couldn't happen but because of the buggines it kind of feels like anything could happen at any time.
- it can be pretty tough.
- the graphics are primitive and there's no in-game voice acting.  makes it more immersive in my opinion.
it actually has a lot of things going for it in terms of immersiveness.  it's got a nice color pallette, sound, music and controls.