*Potential spoiler alert for anyone who will experience Citadel of Fire as a player (if so, don't read this!)*
Ironic that during my first visit to the Goodman Forums in a very long time, I stumble across your post regarding a key part of the d20 Citadel of Fire adventure which I created: Dwyregga.
Let me bore you a bit with some background, and hopefully it will help you develop an approach for this part of the adventure which will lead to an exciting session for your players..
Having essentially learned the game in the halls of the actual Judges Guild in Decatur, IL (back in the early 1980's), I was 'schooled' in the teachings of the original trinity of creators of the hobby (Gary Gygax - creator of TSR, and Dave Arneson - creator of the first Fantasy Campaign known as "Blackmoor", and Bob Bledsaw - co-founder of the Judges Guild and co-creator of the first commercially published detailed game setting: City State of the Invincible Overlord). In the early days, these gentlemen all corresponded with each other and pontificated on role-playing and helped develop the game we know as Dungeons and Dragons today. I corresponded heavily with Bob when he resurrected the Judges Guild in 1999, and my idea for Citadel of Fire was a topic we bandied about for several years. He definitely encouraged some 'old school' thinking in terms of the updated adventure.
I tell you this because it was a hallmark of many of the earliest published adventures that you would see a mix of degree of difficulty when it came to foes: CSIO itself, Gen Con IX, the original Citadel of Fire, Dark Tower, Caverns of Thracia, etc. As was stated earlier in this thread, the originators of the hobby wanted to ensure that role-playing was part of the game. They didn't want players to storm around the setting, slinging their blades with reckless abandon. Negotiating with foes, knowing when to avoid certain foes, and running away to fight another day were all part of the accepted strategems of the day.
The next point I'd like to make is that this adventure is firmly in keeping with Bob Bledsaw's golden rule: "We expect that each referee will alter, expand, and illuminate areas that they wish. Inspiration may require deleting, shrinking, and modifying areas of your choice and is desirable in personalizing this area of your campaign. It is important for you to add and delete treasures that are appropriate to your campaign flavor. Likewise, the mix of monsters might be modified to suit your world mythos." In other words: make it work for you. I wouldn't be offended if you toned down Dwyregga a bit, or if you added an encounter in the village where an agent of the Citadel, full-knowing that Dwyregga lurks out there somewhere, his never-ceasing hatred of the Citadel burning in his shriveled heart, manages to slip into the players' hands some powerful single-use magic item with particular effectiveness against undead creatures, etc.
And like the time-honored Judges Guild tradition of CSIO, Caverns of Thracia, etc, I made sure to write in some competing political interests so that you, as judge, could percolate plot ideas to throw into play. You have Dwyregga, you have the Wizards of the Citadel, you have the Overlord (via the Black Lotus), and you have the mysterious correspondents who are writing to the Lich and working with him to find a way to overthrow the wizards of the Citadel. You'd better believe there is a way to turn that mix into a potential negotiation if you would like to offer it. And Consider that this Lich is very much into self-preservation. While he is indeed powerful, saving his own skin is ever most in his mindset. He is not a huge risk taker. It has taken him eons to build up his power base in the nearby cemetary, and to collect the right assortment of minions with which to protect himself and with which he finally feels bold-enough to begin taking actions against the wizards of the Citadel. Losing many or all of those minions is a devastating blow to Dwyregga - one which player characters can be quite proud of even if they have to come back another day to hunt down the mastermind. Dwyregga cannot recreate these powerful allies overnight. But his strategy is eternal, and patience is something he has plenty of.
Certain encounters in this adventure were specifically designed to be very difficult challenges for powerful player characters. Give it a thorough read, let your mind work through it and develop your own ideas on how you want to run it. If you have some over-arching political plot threads going on in your campaign, this is a perfect place to allow powerful NPC's come into play.
Above all, have fun, and make sure your players do, too! And let us know how it goes...