Personally, I think you should try for something a bit more original than the very basic spell/race/element types. What it looks like now is that you're going for a very detailed terrain structure and very basic combat and magic structure, which seems utterly backwards to me.
Races should be taken into very serious consideration. One thing that could work of course would be to make one or more "basic" races that the first testers are given. Then, through the course of various experiments and fine-tuning, original races would begin to split off from the basic ones, making the old ones obsolete and thus kept behind the scenes. This would tie in with the "players make the backstory" setting.
I seriously think you should reconsider the elements and other magic-bases. Remember that everything is taking place in the air, so things are going to be naturally quite different than life on the ground.
For instance, earth magic is just going to seem out of place. Yes, the floating islands are made out of earth or earth-based materials, but it seems strange to be drawing energy from a hunk of material that is really just a means to an end. There's no big planet or underground power reserves to draw energy from, it's just a chunk of rock that's suspended so far above the ground that you can only see clouds when looking down from it.
Fire magic will also seem a bit strange, since volcanoes will be slightly rare (since they require a rather sizable chunk of land to properly form) and the islands probably won't be large enough to support vast deserts or forests for easy charring. A possible type of fire would of course be lightning, but if that's really the only reason then why call it the fire element?
An interesting example would be NetStorm, which had five elements. Wind, Rain, Thunder, Sun, and Storm. All five were sky-related, and were present at almost all times around or on all the islands. "Storm" was the only odd one out, since it seemed to essentially just be a compilation of the three primary elements (Wind, Rain, Thunder) and couldn't actually be used for anything other than a specific ritual.
The various stages of day would indeed provide a wonderful base for magical spells, since their effects would appear to be even more encompassing when you're sitting on a floating island right in the middle of it.
Distant stars and planets could potentially give you a magical element, similar to the Astral magic path found in Dominions. The various times of day could be elements in and of themselves, allowing their spells to be cast at any time, but with penalties/bonuses applied depending on the time.
On to the races. Ground-based races are going to be seriously out of place, at least in my opinion. Human knights riding horses into battle will be remarkably useless when there's half a mile of open space between you and your opponent. Not even the greatest thoroughbreds could jump that gap. And dwarves are just plain out of luck, as the great mines of their past will be slightly difficult to replicate in the shallow dirt of a suspended island.
I would strongly recommend creatures that either have an innate physical means of flying (wings and such), have the technological proficiency to compensate for their land-locked status (everybody loves a good zeppelin), or have a magical means of transport (the innate magical powers of something like a genie could keep it afloat for longer periods than a flying bird-man, and would allow him to wear heavier equipment. But if something were to cause magical interference in his floating abilities...). Or, you could just have some race that specializes in throwing things really long distances, and thus will attempt to bombard enemy islands and then fight off the troops that come winging their way.
I strongly feel that most battles should take place mid-air, rather than after two islands have locked together. The frantic mêlée of troops swooping down on each other, the graceful fall of a soldier killed in battle, perhaps to be abruptly ended by an island farther down (probably be hell to work out placement and such, but could be fun to be surprised by a rain of bodies falling onto your villages). It all just seems much more interesting than the standard ordeal of elf archers vs. goblin spearmen charging at each other and then falling a measly couple of feet before turning into fertilizer.
And you can find the chaos and order sides of anything, even such things that seem relatively "controlled" such as terraforming or summoning. For instance, a chaotic terraforming spell might cause some highly unusual and unpredictable land combinations (or additions, or subtractions. It is chaos after all), and there's nothing saying that a summoning spell has to bind the creature in question. Or even place it where you were aiming.
Similarly, orderly destructive spells would be very, well, orderly. They may not of the damage potential of chaotic destruction, but they will at least do an almost-predictable amount of damage, and will go where you tell them to.
Speaking of magic, I don't believe it would make much sense for your head mage to bother himself with the minor firebolts and combat imp summonings that should occur during a battle. He should be paying more attention to the big spells that take a lot of time and/or resources to pull together, but that have a very large effect or have an exceptionally long duration (infinite until dispelled would not at all be out of the question for certain enchantments and summonings. They are, after all, what you use to customize your island). Spells should be treated less as spells in the common sense, and more just your magical way of managing things.
As for the minor spells and abilities, I'd feel it would best if those are left to the battle mages. And I'd really rather not have to micro a huge selection of minor spells spread across a troop of spellcasters. That kinda stuff just pisses me off. I think the finer details of combat should be handled as much by the computer as possible, so you can work on more managerial things than having to act as some sort of omnipresent general who can give spontaneous telepathic commands to each individual soldier.
Okay, I think that about covers my current opinion on things. Nothing saying you have to listen to any of this, I'm just describing a game that I personally would like to play.