There is a file, CoreDifficultyLevels.xml that defines some differences.  I can't say (yet) if Difficulty-related changes exist in other files (they can, and probably do).  On my system, the file exists in:

C:\Program Files (x86)\Stardock Games\Elemental\data\English

The contents of the file, while not plain language, can be used to get an understanding of what changes.  An excerpt (for the Novice and Ridiculous difficulty) follows (I didn't want to post the entire contents of the file).

Separately, I wish the code block format option allowed plain text, without trying to format for a specific programming language.

<AIDifficultyLevels>
  <AIDifficultyLevel InternalName="AIDiffLvl_Novice">
    <DisplayName>Novice</DisplayName>
    <AIEconomicRatio>1.00</AIEconomicRatio>
    <AIFOWCheat>0</AIFOWCheat>
    <AIHPRatio>0.90</AIHPRatio>
    <AIStartingFundsRatio>0.75</AIStartingFundsRatio>
    <AISovereignPointsRatio>1.0</AISovereignPointsRatio>
    <AISovereignHPRatios>1.0</AISovereignHPRatios>
    <AIIntelligenceFactor>0.00</AIIntelligenceFactor>
    <AIUsesCombatMagic>0</AIUsesCombatMagic>
  </AIDifficultyLevel>

  <AIDifficultyLevel InternalName="AIDiffLvl_Ridiculous">
    <DisplayName>Ridiculous</DisplayName>
    <AIEconomicRatio>2.0</AIEconomicRatio>
    <AIFOWCheat>1</AIFOWCheat>
    <AIHPRatio>1.20</AIHPRatio>
    <AIStartingFundsRatio>10.0</AIStartingFundsRatio>
    <AISovereignPointsRatio>1.0</AISovereignPointsRatio>
    <AISovereignHPRatios>1.0</AISovereignHPRatios>
    <AIIntelligenceFactor>1.0</AIIntelligenceFactor>
    <AIUsesCombatMagic>1</AIUsesCombatMagic>
  </AIDifficultyLevel>
</AIDifficultyLevels>
  

  

See the edited post.  The forum code block didn't do what I was expecting.

P.S., to roll-your-own difficulty setting appears to be simply a matter of creating a new XML block (or even editing an existing one) and putting in your own values as desired.

The "Normal" setting has no fog-of-war cheat (the AI can't see the entire map all the time, just like you), no hit point bonuses for the sovereign, and no economic bonuses.

Try this for a custom AI set addition.

Create a "Mods" folder in your game install directory.  Example for Win7x64:

C:\Program Files (x86)\Stardock Games\Elemental\Mods

In that folder, create a text file and name it something useful, such as:

CustomDifficultyLevels.xml

The intent of that file is to store any/all customized AI difficulty settings.  Copy+paste the following indented text into this file.

<?xml version="1.0" encoding="utf-8"?>

<AIDifficultyLevels>
  <AIDifficultyLevel InternalName="AIDiffLvl_CustomEasy">
    <DisplayName>Smarter Easy</DisplayName>
    <AIEconomicRatio>0.90</AIEconomicRatio>
    <AIFOWCheat>0</AIFOWCheat>
    <AIHPRatio>1.00</AIHPRatio>
    <AIStartingFundsRatio>1.0</AIStartingFundsRatio>
    <AISovereignPointsRatio>1.0</AISovereignPointsRatio>
    <AISovereignHPRatios>1.0</AISovereignHPRatios>
    <AIIntelligenceFactor>1.0</AIIntelligenceFactor>
    <AIUsesCombatMagic>0</AIUsesCombatMagic>
  </AIDifficultyLevel>
  <AIDifficultyLevel InternalName="AIDiffLvl_CustomNormal">
    <DisplayName>Smarter Normal</DisplayName>
    <AIEconomicRatio>1.00</AIEconomicRatio>
    <AIFOWCheat>0</AIFOWCheat>
    <AIHPRatio>1.00</AIHPRatio>
    <AIStartingFundsRatio>1.0</AIStartingFundsRatio>
    <AISovereignPointsRatio>1.0</AISovereignPointsRatio>
    <AISovereignHPRatios>1.0</AISovereignHPRatios>
    <AIIntelligenceFactor>1.0</AIIntelligenceFactor>
    <AIUsesCombatMagic>1</AIUsesCombatMagic>
  </AIDifficultyLevel>
</AIDifficultyLevels>
  

When you next start up Elemental, you'll have Difficulty options named "Smarter Easy" and "Smarter Normal", in addition to all the default AIs.  The difference between the custom and default AI sets is the AIntelligenceFactor.  The custom sets use the same setting as the default Ridiculous AI, but without all the other 'cheats' of the Ridiculous AI.  These custom AIs haven't been play-tested.  They're to illustrate an example of how to customize your own AI.  That said, I do plan to actually use "Smarter Normal" myself.  Roll your own settings as you see fit, using the above as a guideline and example of how to implement the changes.

I was having problems getting the mod to show also.  After reviewing other posts on mods I realized the issue is the folder path. On windows 7 you need to put the file into your C:\My Documents\My Games\ Elemental\ Mod  folder.

 One of the things I really HATE about Windows 7 is how it forces things onto the C drive and the My Documents folder.  I put this game and others on a different drive for a reason let me control my own equipment please. Sorry for the rant.

After not being able to get the changes to load from a mod file I went in and read the original CoreDifficultyLevels.xml As I see it your custom smarter normal is identical to the original normal (absent some decimal places).  Did you post the "Smarter Normal" as an example or is it intended to change something I am missing?  I liked the AI Intelligence Factor change from 0.5 to 1.0 in the "Smarter Easy" version. I now have them to working in game start menu for selection.

___ Begins original game file  excerpt____

</AIDifficultyLevel> -<AIDifficultyLevel InternalName="AIDiffLvl_Normal">

 <DisplayName>Normal</DisplayName>

  <AIEconomicRatio>1.00</AIEconomicRatio>

  <AIFOWCheat>0</AIFOWCheat>

  <AIHPRatio>1</AIHPRatio>

  <AIStartingFundsRatio>1</AIStartingFundsRatio>

  <AISovereignPointsRatio>1</AISovereignPointsRatio>

  <AISovereignHPRatios>1</AISovereignHPRatios>

  <AIIntelligenceFactor>1</AIIntelligenceFactor>

  <AIUsesCombatMagic>1</AIUsesCombatMagic>

____ End original game file excerpt______