You can't make heightmap in paint at all as far as I know.
You must have Gimp atleast, download it from their site and install it.
Grayscale is an image that's in black and white and contains no colours. "Grayscale mode" is used for making heightmap, if they aren't, it will crash the game.
You make hills by making so called "heightmaps". How to make one can be found on various places such as the documentation part of the forum or user made tutorials section.