Magic is a thing which was discussed for a long time, it is in the roadmap even. The way it can be implemented may be speculated, what I suggest is to make most of it an Elf-exclusive thing.
The reason why is that it will add both usefulness to them if you decide to be their friend, and challenge if you decide to be their enemy. Elven caravans have much less useful stuff than human/dwarven ones, and during sieges they are equipped with weak wooden armor/weaponry. Magic on their side will definetely help them to keep up with others.
If you are friends with elven civilization, they may offer to you powerful healing services - able to restore normally incurable conditions, like severed nerves and limbs, vampire/werewolf curses or insanity. Since they are nature themed, you may ask them to change the weather for some time - prolong summer or cut the winter. Ward your units against curses and undead. Bless your crops to yield more fruits, or your warriors to be more durable, and so on. In exchange for additional restrictions, fulfillment of diplomatic needs, or goods/gold.
If you are enemies - in additional usual combat magic (fireballs, magic missiles, summoning of legendary monsters and such) they may use various rites, which should be interrupted or your fort will be cursed. Start an everlasting winter with ridicuosily low temperature, curse dwarves for their wounds to fester and heal much more slowly, spoil your crops and food, make your dorfs much more suspectible to stress, tantrums and insanity, and so on.
I think this will make elves much more viable threat or friends. Of course some of the magic might be accessible to other races, in forms of enchanted artifacts or rare deep underground !!fun!!, but I think for elves it should be main gimmick and thing they use often, and for others it should be a rarity.
And it should be easily moddable to give spells to your dorfs, if you don't want it to be mostly an elven thing, and get some bearded spellcasters!