have you considered, vorlon an shadows should be overpowered by beginning of the game, but have just other win-conditions than overwhelming galaxy? e.g Vorlons: "form galactic förderation of younger races and shadows do not exist"

Seems like a good ideal on Xarfai's part. Something to make them less combat orientated from the AI perspective. Actually, I don't know if this would be possible.. but could you set it up in a way. That if no player picks them they become Fallen Empires? Or if one is picked the other gets set as such? This would prevent an ai from running around with them at game start if they are over powered. Though I would like the option to pick on as a player if possible.

I'd suggest studying the Brunai Imperium. It's basically a shadow mod. I don't know if the two teams can work together. But you could always study the things they did to see if it might be possible to implement some of the concepts to your fuller version of the Bab 5 universe.