The description of the option has all the information – you need to click on the elves first, then on the centaurs (or vice versa), and they will merge. However, I haven't used this option myself; I installed the Era scripts rus mod by Algor, where centaurs upgrade to Sylvan (archers), and elves upgrade to snipers; the Rampart was my favorite city in Woge. :D
I have never used the option to upgrade the capital myself, and I haven't heard of anyone using it, so I can't say anything about it.
Added after 1 hour 57 minutes
Wow, it worked!))) But I didn't do that; I specifically remember that I was turning centaurs into elves, not into some elf-centaurs, but specifically into elf archers; to transform them, you needed gold and the centaurs themselves) there was no experience in the troops, and I don't even remember if there was such a setting in Woge.