My knee-jerk reaction when I found out about the engine was to be upset, but when I thought about it, it's not really any different than all the groups do at this level...it's just that the engine is well known.
I'm more interested in the scene's artistic growth these days anyways...art in real-time, hyper constraints, etc.
In my opinion, a demo, in addition to artistic expression, is a showcase of the technical skill of its creators.
Using a pre-built engine is not quite up to the standard I would normally expect to see.
However, an argument could be made that the Unreal Engine itself is a platform (like the C64, PC, Windows, etc.), and pushing that platform's boundaries is keeping with the spirit of the demoscene.
If we restrict one from using something like Unreal, do we restrict also the use of something like OpenGL or DirectX? Or Windows/Linux itself? There are a lot of layers of abstraction we can remove.
I personally value both pacing and merit. I love demos where I ask myself "how did they do that!?", and I love demos where I forget to ask that question while I'm watching them. This one, I found rather uninspired, and obviously very weak in the merit department. It clearly does not deserve a 2nd place; there's just too little of value that the authors brought to the table. In fact, their biggest contribution may be to open the door for other sceners to use UE4 for great things.