Wait, wasn't ME2 PS3 the first iteration of this new engine?
Or am I remembering it wrong?
Correct as far as the PR goes. The PS3 version of ME2 runs on the ME3 engine.
I would imagine that they still made changes afterwards because of Kinect support and all.
Also, memory ceiling with Kinect seems somewhat strange, since the PS3 version runs worse than the Xbox360 version of the demo. So I don't think Kinect is the bigger problem here.
Honestly, I think it's mostly just UE3's inability to render huge setpieces without taking a massive hit to performance unless you replace a lot of stuff with 2D elements. Aside from Epic itself with Gears of War, nobody else figured out how to use UE3 for 'big scale rendering'. It was also the key point for the lawsuit by Silicon Knights against Epic.
Bulletstorm for instance, just uses 2D backgrounds which is very noticable on a PC, but less so on consoles. Crysis 2, while a different engine, does this as well at some point (watch for flocks of birds). Other UE3 games appear to "avoid" the problem by allowing environments to remain mostly empty.
I do believe that Epic was heavily involved with the creation of Mass Effect (not sure where I picked that up), since that game was basically a huge UE3 showoff at the time. I imagine that this support has since dissappeared, yet the scale needed has gone up.
Sooo, now I have to play both games on the PC again...

(ME2 was a rock solid 60 fps on my system, the ME3 demo takes a few hits to 45 during heavy combat and particle effects (the close up on the fire early on with Anderson in particular), but mostly 55-60. Still, the difference makes me think that ME3 just has more 'to do' in terms of rendering.)
also: Doors. Fucking doors. My virtual nemesis returns.
(couldn't figure out for the life of me that I needed to press spacebar there. Silly, I know.)