Galadriel in the Middle earth of the Third Age is incredibly powerful because she is a 'big fish in a small pond'. She has sought power throughout her time in Middle earth, and eventually has come to set up her own realm, an enclave which she rules. She had the Elessar given to her by Celebrimbor, who then created something of even greater power, Nenya, as a gift to impress her. His gifts to her are each more powerful than the last, and he does this in the hope of winning her love (seemingly) by giving her more and more power.
We do not know to what levels of strength the Elves in the Undying Lands have grown while Galadriel is in exile, but we must assume that due to her exile she is in some way less than they are. Eru's intention is for the Elves to all live in the Undying Lands, and this is seen as natural for them - as seen in how they are reborn in the Halls of Mandos and to refuse this is considered wrong. In addition, she was one of those who left the Undying Lands to go to Middle earth, which was also a wrongdoing. Galadriel has willingly removed herself from the land where she is supposed to be, and therefore has done wrong so cannot be seen as 'good' as her kin who did not leave.
When she says that she will 'diminish' and return, she is saying that she will give up the power she has achieved in Middle earth and she will go back to the place where she will not be a ruler, a leader, someone of immense power. She will go back to the place where she is just one amongst many.
I don't know where this places her in terms of 'power' compared to Luthien, but then I think in Tolkien's world it is more about qualities than power. After all, we see how a humble Hobbit can destroy something supposedly more powerful. Is it more a question of who had the greater status?
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