I find a lot of rationalization about published material by gamers on the forums. If it is in print, then it must be good and here are the reasons a), b) and c). Not that you are necessarily doing this, but I do have to ask if you are trying to be totally objective in your rationalization of this duel as a good encounter.
Is practically forcing a PC to take a dirt nap REALLY a good encounter idea? Or is it just an encounter idea that happens to be printed, and hence, the DM should just go with it? Does it really add anything to the game, or is it just a heavy handed way to introduce a reoccurring villain?
To me... yeah, it's introducing a recurring villain, but I don't find it heavy-handed.
If you need to introduce a villain that is more powerful than the PCs under the expectation that this villain could and should come back in future installments... and that you want the villain to actually interact with the PCs and not just stand above and beyond everyone... you need to do something. And I find this scenario in the module completely plausible.
This Big Bad has wandered the village during the raid, having absolutely no competition from anyone. It's probably been boring as hell. Nothing has gotten his blood going, no one has given him a fight. He's a warrior... he wants to be challenged. Thus far it hasn't happened.
Then at the end... after they have pretty much wiped up the town... he doesn't want to leave without a good fight. So he demands the village send out their best challenger to him so he can get some quality action before they leave (and he uses threatening villagers as the impetus for that person to come out). As the module writes the baseline expectation so DMs can understand what's happening, one of the PCs probably fits this bill the most so hopefully one of them volunteer-- knowing full well that they might be sacrificing their own life to protect the lives of the villagers.
That's a player playing his/her PC in character. They are choosing to make the ultimate sacrifice because in character that's what their PC would do. And that kind of scenario for me is an awesome roleplay scenario for a player to deal with.
Then... once the player decides his/her character is willing to give their life for the villagers, they go out and fight the Big Bad. However, the Big Bad find out pretty quickly that even the village's BEST challenger sucks and it's not a true test or fight. So the Big Bad just says "screw it" and leaves. Now you ask why the Big Bad doesn't kill the PC? Because the PC has been proven not even to be worth killing. The PC is a gnat. Insignificant. The Big Bad knows he gains nothing by doing so... especially considering he's Lawful Evil. Killing so far beneath you doesn't gain you anything, so why even waste the time. And this is distinctly different than the "stupid Bond villain" trope... because at least in those movies... the Big Bad KNOWS he's James Bond (or at least a member of the British Secret Service) and thus has some skill and worth at the barest minimum. He didn't get to be a member of MI6 by being a nobody. But everyone in this village of Greenest? An anthill full of ants. Worthless. So the Big Bad just sighs and walks away.
Now that being said, KarinsDad... I will grant you one thing. If your primary argument that it's too early in the campaign for that kind of Catch 22 sacrifice because the player hasn't gotten as attached to his/her PC... and thus they aren't really making a grand sacrifice they're just throwing away a sheet of paper with some numbers on it... okay, yeah, I could buy that argument. A player being asked to sacrifice their character one or two sessions in before the character has done anything where it truly would be a sacrifice on the part of the player... sure. That ain't the best time to do it. I'll buy that.
But I wouldn't rule out this kind of plot or scenario as bad on the whole. There's a time and a place for it for maximum impact and can lend itself to great character drama. But yeah, perhaps in Episode One of this adventure isn't it, depending on the type of players playing the game. But I also think that like what happened in your game... those tables who aren't buying the "ultimate sacrifice" trope this early in the game are going to find others way around it. Which also makes for good drama and creative thinking.
So no... I don't think this scenario is out-and-out horrible on the face of it. Could it be used better at a different time in the story? Sure. But does it makes sense to me why it would occur? Absolutely. And as I like this sort of interesting roleplaying condundrums and challenges, I also don't think you gain anything by not introducing them early in a PCs career. Because holding off on them implies that new PCs aren't worth challenging from an RP perspective until they've "become important". But that's just me and how I play.