While I think it's awesome to award experience for in-character behavior, it's also very hard to quantify role playing into experience (how much gets you 100exp?)
On top of that, in DnD, exp translates very observably to combat prowess - so it also makes sense to give other types of benefits.
Good role playing should give good role-playing benefits. If the character keeps in touch with their mother have their mother notice and do something when they've been imprisoned by the Necromancer for a week. If the player helps an old lady cross a river make her turn out to be the Godess Hera, who blesses them. If the character is a bigot and flips off a Dwarf in a tavern, have other bigots in the tavern for them to relate to, and turn them into contacts... etc
It sounds like you have a very acceptable fire-focused intention. I suspect one of the things that is complicating matters is the fact that:
The Mage Wizard can select 2 Encounter powers per level, so that offers some variety. It helps that the DM lets us waive the restrictions on the number of powers we can use per day. I think that's why he makes the monsters so strong in each encounter, so they don't get wiped out easily.
Therefore, much of the normal optimisation advise, which assumes that you're holding to the normal rules starts melting away as the vicious circle of buff and counterbuff begins. (I faced this problem in a "by the rules" game when the DM reacted to the party's increasing optimisation by ramping up monsters, which caused us to optimise more, which...)
From a pragmatic perspective, save ends effects suck. While much of the game is well modelled, there is precious little balance to save ends effects, and the pendulum swings back and forth: standard monsters have little to no defense, but elites and solos become effectively immune as the game design progressed through the monster manuals. It takes a very deft touch in monster creation (if you're creating monsters "from scratch" to respect player agency in the inflicting of status while simply not going "nope!" to either them automatically winning or to them automatically being ignored.)
I, personally, have always enjoyed the more controlly-type controllers, and so my wizards, druids, psions, and invokers have focused on debuffing and forced movement. So long as you rely on effects that are more difficult to shed (either being end of next turn or encounter long) then you can focus on being to reliably land them, rather than inflicting sufficient debuffs to the monster's saving throws (that'll only be countered by the next monster) to maintain the debuff. The same thing is true in the other direction. I've played paladins who granted +9 to saving throws by smiling. This led to the DM completely foregoing the use of save-ends effects until the DM and I agreed to voluntarily limit that feat to a +5 bonus.
My recommendations are:
Nothing is as powerful alone compared to a party that is designed to work together.
Stop focusing on solo optmisation. It's a trap. Instead, try to make sure the party is designed to work together to achieve your desired requirements. Everyone will have more fun, and you're unlikely to bear the brunt of your DM's nerfing alone.
Have a side conversation with your DM: Explore what debuffs he's comfortable with.
Boundary setting is important. If you have a chat over coffee as to what he considers reasonable, you won't find the powers nerfed in the middle of a game. Set up, describe, and agree upon expectations for your character's capabilities such that he knows what to expect (such as to provide you maximum Fun) with the minimum of unpleasant surprises. As 4e is very much combat-as-sport, the joy is in the execution of plans within a chosen narrative (yes, story matters, to provide a need and justification for mechanics) than it is finding unusual solutions to the DM's prepared set-piece battles (many other systems are far far better at simulation).
It's very hard to alter characters in midstream without a retcon. Be honest and do a proper retcon, don't just knudge.
A character is the combination of her parts and their interactions, not just the parts alone. If you're changing a character's rasion d'etre, be honest about it, and change the character completely to fit your new requirements.
Best Answer
The thing to realize about 4e is, it's a combat system. 90% of it is to do with fighting, which is why the aren't any rules for integrating powers into other parts of the game. This is not to say you can't use them outside of combat at all, but that you'd have to rely on your own (and GM's) judgement. So there's nothing wrong with discarding damage in general.
With regards to the specific power in question, I'd probably rule that ripping memories out of someone's head may very well result in hit point loss representing migraine they get, up to unconsciousness. I'd offer a skill check to mitigate that damage, as rolling to-hit against commoners is pointless.
As medivh points out, damage is a fickle abstraction. 4e is not made to "make sense". Ability to do more damage (and, in fact, hit points and damage as such) doesn't really correspond to anything in-world, so saying a character loses the capability to do less damage as they gain levels is meaningless. See also my old blog post.
For bonus points, here's a more generalized approach we've used in our campaign. Very broadly defined skills of 4e take care of most of the out-of-combat "fluff". Arcana lets you do magic-y stuff, Athletics lets you get places and break things. On top of this, some powers provide exceptional capabilities, extending what skills can do. Some people teleport, others rip out memories. Finally, even things like Paragon Path or feats may suggest what a character can reasonably accomplish, again, extending skills use.
When it comes to a more structured form of out-of-combat tasks, skill challenges, at-wills enable usage of a skill that would otherwise be inappropriate, or grant +2 to the skill if they're particularly fitting to the task at hand. Fitting encounter powers grant a +5 bonus, and fitting dailies grant an auto success.
This is, of course, entirely a house rule.