Guesser's explanation of how the game works over at the CSS site:

The short and techy answer is that the TV is unable to completely 
separate the high frequency transitions in the luminance signal from the 
modulated chrominance, so some of the black and white signal leaks into 
the colour. 

By generating a specific pattern on screen that high frequency cross 
colour interference can be manipulated to make the TV generate stable 
blocks of colour. 

The effect is being caused by the limitations of the analogue video 
circuitry and the way a PAL video signal works. Emulators of course 
represent an ideal video signal with unlimited bandwidth etc and make no 
attempt to accurately model a PAL signal.