The problem with Solitude is not just the wide streets. The only reason it feels as big as it does is because the castle occupies a big chunk of land and the rest of the city is basically a straight line.
Skingrad had it's castle towering above the city (In a separate world space if you didn't use open cities), which to me, made if feel far more epic and gave it that deepest darkest Transylvania feeling to it. The Castle in Solitude isn't really that visible despite it's size. When you first walk in, the castle just blends into the mountain behind it. From the Blue Palace, it's too far away to be impressive. Perhaps if they had built the castle onto the mountain, what am I saying? Of course, if they had built the castle onto the mountain, they could have gained that same domineering feel.
I live in a castle, so perhaps I pay attention more than most about design of them in game. Castles were built to intimidate. That's it. Defence was always secondary, there is only so much you can do in a siege (most of it involved eating your horses), so their best form of defence was to intimidate the enemy into not attacking in the first place. Solitude just doesn't have that. Putting it where the Blue Palace is would have been better to achieve that affect, as would shoving it on top of the mountain. Right now, not only is it not intimidating, it's not even very noticeable.
And you are right, the rest of the city suffers because of it's poor location choice.
Edit: It has a very fitting name though.
