The issue with Kenata's mod is that, although it's an amazing piece of work, it's extremely constrained by the limitations of the moding engine right now. There's a lot of stuff that could add strategic depth that currently cannot be coded into the game. Passive, reactive or conditional abilities aren't in the game yet, for the most part.
Also, abilities and a richer environment for tactical battles go hand in hand. Stealth/speed related abilities need a larger battlefield with cover and hiding places. Wall crushing/climbing requires walls to crush/climb. Etc. They could also benefit from somewhat more complex combat rules: positioning, D&D-style attack of opportunities or zone of controls. Abilities that interact with those rules could add a lot to the game.
Otherwise, yes, Kenata is right. Take a simple example, magic the gathering: a huge number of cards and creatures, almost all different, and many interesting and useable in a way or another. Almost all of them have abilities (the ones that don't actually become interesting because they're relatvely unfrequent and trade their lack of abilities for slightly increased straight power).
Consider though that, ZoC in D&D is about 5 feet around the unit in question, where as a square in WoM tactical combat is enough to hold 12 troops. On top of this, the average moves per turn for a unit is 2. This is not enough to simply move through without still being in attack range at some point for most units. As for the retreat-penalty, this would be something better placed when a unit actually retreats from combat instead of moving out of combat range.
The point he makes, though, is still interesting. The point of AoO is to allow you to prevent the opponent from ignoring your line of defense in a turn-based environement. In a Total War game, in there's a hole between 2 units of the defender's front line and the attacker just goes through without any other backup tactics, the attacker will have its flank naturally exposed and will put himself in a pincer formation. But this is real time: if someone goes between 2 of the units of my defensive line, I just ask my 2 units to attack on both sides while he is moving.
In Elemental, there is neither facing (sides and front are the same) nor flanking (having 2 units around an enemy units doesn't give a bonus) and you can't react in real time to an opponent going through your line of defense. AoO model the reaction in a tactically interesting (if not very realistic) fashion, allowing you to maintain a real line of defense.
In other words: abilities aren't enough: we need more importance given to positioning. Interaction between this and abilities could give much richer tactical battles.