Holy crap, it's like having two Neota/AIs and I'm comprehending only half their discussion! It's pretty interesting to see that a game would have to do so many tricks, just to squeeze in transparencies (I think that's what they were talking about).
I feel sorry for the poor bastards that had to brainstorm the process by which they'd create a game with such constraints. It was after the time when games were relatively simple and before the time games were relatively simple to make.
Saimo was talking about a single-color transparency (choosing a single color, and then being able to mix that in a fixed proportion with any of the normal 16 colors)
What I was talking about was using a single palette index exclusively for drawing shadows, so that shadows can be enabled/disabled on any particular set of scanlines.
(roughly. You may not be able to get it accurate to 1 scanline.. but accurate to 4 would be okay)
With what saimo is talking about, you'd be able to blit a shadow mask onto the 5th bitplane, and that would be all that is needed to make an object cast a shadow.
With what I'm talking about, you'd be able to vary the depth of the shadows across the Y axis.