The TV Burp comic claimed that the show would be both a "celebration" and a "piss-take" of the Simon Cowell entertainment series.
"I was watching the last X Factor final, drunk, and thought it was a good idea," Hill told The Telegraph.
"[Simon Cowell] liked it, so we're doing it. It's like a TV Burp treatment... to get the lovers and haters in. It's not caustic, like Jerry Springer: The Opera. That would be quite an easy route to take, but we want it to be funny above everything."
Hill is writing the production with his friend Steve Brown, who is penning the music.
The comic has also confirmed his plans to make a film in 2013.
"I've been trying for ages to get a film off the ground. A film or films. That is what I'm doing next, making a Harry Hill film. But every comedian now is making a film. When I thought of the idea no one was," he said.
"I think the bounce from The Inbetweeners film is helping a lot. Keith Lemon is making a film. Vic [Reeves] was saying he was going to make a film. Alan Partridge is. You're going to have hundreds of films. One of them is going to flop and then no one will make another one for about ten years. That's the idea. I'm going to write that in the spring."
Hill is currently promoting a one-off reunion special for his cult '90s TV series. Whatever Happened to Harry Hill will air as part of Channel 4's Funny Fortnight on Thursday August 23 at 9pm on Channel 4.