The stone blockade has an effect where it can only be damaged when it takes at least than 22 damage from a single hit. It takes half damage from piercing, regular damage form thunder and bludgeoning, double damage from force and it's immune to all other damage types. So you can go the easy way and just blow it up with some kind of explosives, but then you risk injuring someone (which causes them to attack you). Depending on your party composition you often have at least one party member who can destroy the wall without explosives.
If you want to use explosives, you can set them on the ground and light them from distance. Then the npcs will walk away so it's less likely to accidentally damage them.
As for how the fight is supposed to go, I noticed the following options, depending on your actions:
- If you damage any npcs with explosives you'll have to fight everyone instantly, otherwise you'll talk to Nere before combat starts.
- It's possible to ally with the majority of the duergar against Nere and the remaining duergar.
- It's possible to free the gnomes and only kill Nere and the duergar. The gnomes are yellow during the fight in that case, so make sure you don't hit them with anything.
- There seems to be an option to side with Nere against the duergar, but I never tried that.
