Thank you for the kind words and checking out The Vanishing Vale!
And all great questions.
I think the intent behind the having The Monarch appear on the Random Encounters table is to make the dungeon feel alive and not just limit her to her domain or lair. If you feel like it doesn't make sense maybe up everything else on the encounter table and have 1-2: Nothing, instead. In fact I might do that myself in a v1.2.
The thought behind the village vanishing and the lich is kind of described under the subheading Tracking the Ritual. Admittedly I could have been more explicit in what was happening but I was kind of strapped for room with the formatting. Long-story-short, the town flickers in-and-out of existence each time her ritual surges. As that happens, Evanstref looses 100 people (which converts them into butterflies, see below). That sacrifice makes the village flicker between planes and fuels The Monarch's apotheosis (ascension to the next level of "lichdom", which would reset HP and stats).
Fun additional note that came up during playtesting (that I absolutely don't have room to add in the bi-fold format), each butterfly that the party encounters is the consciousness of a deceased village member. So each time the ritual surges, more butterflies are summoned into the dungeon, thereby increasing The Monarch's power.
If I ever get around to an expanded version of The Vanishing Vale, I'll definitely include all of this in the written adventure to hopefully make it more clear.