The original concept for elemental had something like this -- essence was the 'power' and it had to be invested to create a city. If a Sov created a lot of cities, that reduced his/her personal power. A Sov that only had a few cities had more personal power. Thus there was a balance between the large and small empires -- the large had relatively many cities but the sov had relatively little personal power to cast with, and the small had relatively few cities but relatively great personal power to cast with.
I think that would be a workable solution, and a fun one to play out.
The problem with using essence to build a city is that, at least with the current mechanics, weakening your sovereign doesn't really matter. By the mid game, the generic units are good enought that no matter how much you level up your sovereign, he/she can probably be one-shotted with arrows/catapults/other magic users. And because of that, the only time your sovereign is likely to see combat is when the city he/she is stationed in is under attack, because going on the offensive with your sovereign is pretty much suicide. That is of course a whole other problem that already has threads devoted to it.
If weakening your sovereign actually mattered, I would agree that going back to requiring essence to build a city would be a good idea. Plus, essence has come a long way from the original plans for it (not necissarily good). I'm still waiting for the ability to imbue fortresses, regular units, etc to make them stronger (similar to the Sauron mechanic you mentioned). Essense isn't really significant enough anymore for it to be a good limiting factor on growth, but again, that is a topic for another discussion.
Other people brought up how your battle rating is calculated, and that is definetly something contributing to the problems of small kingdoms. Magical ability is completely ignored. Someone can have 100 essence, 200 intelligence, and chain lightning and whatever, and still have "0" for their combat rating, which is just wrong.
This is a stratagy game and part of stratagy is having to adapt to you situation. If you start with little rescources you are going to have to expand. Spam small towns and start wars. If you have lots of rescources then you can build your large city and have your small kingdom. It can work. You should keep in mind prestige if you want to do it. Start your Sovereign as royalty. because it takes a long time to get 1250 population.
The problem isn't starting with few resources, it's starting where expansion is severely limited. Spamming a bunch of small towns to get resources is impossible (not to mention the fact that city spam should be discouraged). Getting the population up isn't the issue either (I was royalty, anyway). It's that a kingdom consisting of a handful of high level, large cities can't compete with a kingdom of a bunch of low level, small cities.
A small kingdom can't compete militarily with a large one, but that makes sense and I don't have a problem with that. But the small kingdom can't compete with a large one on any level. Diplomacy *should* make sense as an option, but it doesn't. If the other options are impossible, then diplomacy makes the best sense. Ally yourself with someone bigger and stronger. But it doesn't work that way.
About resources, in the preview videos and such that Brad did, he mentioned a lot that it would be better to focus on expanding a few of your cities to encompass as much land as possible. In fact, a level 5 city casts influence over a huge amount of territory. But because of the resource linkage bug/feature, most of that territory is worthless. Sure, you can build on the resources in it, but you can't use it. Yes, you can snake your city until it looks like a spider web to get it close enough to your resources, but I was under the impression that the whole point of being able to build on anything in your territory was to avoid city snaking. Even with snaking, there will still probably be resources at the edges that you can't get close enough to.
