I have also found a way to get the Hidden PalaceZone using KGen. Step-by-step instructions are given below. You will need KGen98, the Sonic 2 ROM and a hex editor.
(This is rather complicated, so follow each instruction carefully)
1. Load KGen98 and the Sonic 2 ROM
2. Press 1 on the title screen. (This will select Save slot 1)
3. Do the Level select and Debug codes as normal.
4. On the level select, hold A and START on Emerald Hill 1.
5. As soon as the zone title disappears, press F5 to save the
snap file.
Now comes the tricky part.
6. Go into DOS, and use a hex editor to load
thefile SONIC2--.KS1. (Replace SONIC2 with
whatever your Sonic 2 ROM is called)
7. Look near the hex address 0011EA0. You should find a series of
codes:
00 06 B0 00 00 03 00. Change the bit after B0 from 00 to 08.
8. Save your changes and exit the hex editor.
9. Restart KGen, load the Sonic 2 ROM and press 1 then F8 to load
your game.
(You will notice that some of the scenery will have gone weird)
10. Allow Sonic to die.
When the level restarts, you will have the unfinished HIDDEN PALACE ZONE ACT 1!