I notice there is only a partial credits list for Sonic 1, and I thought I'd provide a full list. I think for a site dedicated in particular to Zones, the level artists should at least be mentioned.

However, Sonic 1's credits employ nicknames for each of the staff, supposedly at Sega's command. Yuji was apparently miffed enough at this to include a full credits screen, only accessible through a secret code. The thing is, it's in Japanese, so it's only useful if you can translate it. I've seen attempted translations time and again, but they invariably have at least one inaccuracy. So here is the "perfect" list:

Program : (Means scripting of the object behaviour, the silky smooth motion engine, and game rules - everything under the hood)
Yuji Naka [中　裕司] "Yu2"
(This man can do things with code unrivaled before or since. Currently has his own company, Prope.)

Game Plan : (Means object placement, and zone terrain layout. A very important job, almost like a director)
Hirokazu Yasuhara [安原　広和] "Carol Yas"
(The last Sonic game he worked on was 3D Blast. Currently works at Naughty Dog.)

Character Design : (Means not only the original concept and sketches of the characters (including Sonic, Robotnik, and all the enemies), but the in-game sprite graphics, as well)
Naoto Ohshima [大島　直人] "Big Island"
(He directed Sonic CD, Nights, and Burning Rangers. Currently works at Artoon.)

Design : (A vague term, but means Zone Artists. If what's been said about Sonic 2's development is any indication, each level is wholy designed by one of the two artists, not split amongst the team)
Jina Ishiwatari [石渡　爾奈] "Jinya"
(Worked on Sonic 1 and 2. Otherwise, little is known.)
Rieko Kodama [片岡　理恵子] "Phenix Rie"
[Note : The last name here translates literally into Kataoka, not Kodama. It IS the same person who is commonly known as Rieko (yes, RIEKO, not REIKO) Kodama, though, so I guess it might be a maiden name, married name thing.]
(She worked on Sonic 1 and 2, and is the creative force behind the original Phantasy Star games and Skies of Arcadia. Known as "The 1st Lady of RPGs".)

Sound Produce : (Means music composer, but not sound effects or programming)
Masato Nakamura [中村　正人]
(Bassist and mastermind of Japanese pop sensation Dreams Come True. Composed the Sonic tunes for both Sonic 1 and 2 during recording albums with the band, and so the motifs used in both the games and albums are strikingly similar. Ironically, he confesses to be no good at video games.)

Sound Program : (Means sound effect design and programming, and conversion of the composer's music to program code)
Hiroshi Kubota [久保田　浩] "Jimita"
(Worked on Sorcerian as a composer.)
Yukifumi Makino [牧野　幸文] "Macky"
(Works on almost every Sonic Team game, even Phantasy Star Online.)

These people are all extremely talented, so let's not let them go unremembered (or misspelt!).

About the concept sketch of what you thought might be Green Hill...

Do you think it would have been way too early for them to be thinking of a sort of Hidden Palace Zone?
What if the fixation with such a zone was present from the very beginning? The fantastical scenery and the castle in the background just give me similar vibes... Of course, not everything mysterious in Sonic has be pinned back to Hidden Palace. Maybe it's just a fan fixation. XD

Ceylon might be correct. i have no doubt that Zones were thought of earlier, but placed (or deleted) in/from different Sonic games. Zones might've been set aside for later uses in other levels concerning Sonic games. it would not be too early to be thinking of zones such as hidden palace, especially if these sketches were done during a SEGA brain-storm session.