From the readme:
It will work regardless of which directory it is installed into.
So you can install it anywhere, you just have to have the program running while you play. Personally, I just put it into a MWSE folder inside the Morrowind folder. Same one as the Morrowind exe.
Logorouge is right, MGE has MWSE bundled inside it. It's easier to deal with, in my opinion, and gives additional options. But that's if you use MGE.