ECL +3 is balanced; half-elementals are by no means less powerful than half-celestials/fiends. The better spell-like abilities and possibility of natural armor (or special movement) compensate for the slightly reduced ability score bonuses.
And yes, your half-elemental dwarf is treated like any other creature when increasing in level, so a 19th-level half-fire elemental dwarf gets all the half-fire elemental powers, for example.