Well, if you have been reading some other discussions and comments, then you would know that:
1) You are not the only one to think that the preferred terrain is annoying
2) DerMentat mentioned multipe times, that once the mod is 'complete' (which it now is I think), compability versions will be released, including a change to the preferred terrain.

So, from what I gathered, it already is in work :)

I'm using Adventure Mod - New Faction Compatibility to sort that. It's by the same author and from what I've read only requires this mod to function.

I suggest to update description of this mod to describe that New Faction Compatibility mod removes unhappiness penalty. I have been waiting for it for almost a year, now I can get back to Adventure mod, thanks!

It seems I've overlooked this discussion (again). Yeah, the New Faction Compatibility mod removes the happiness system. And I agree that it could be mentioned on the description page.

While it may be true that there is a mod to remove the happiness system and thankyou for mentioning it, my initial posting was about the question if the system can be improved, so can it be improved?

I don't understand what you're exactly suggesting in your OP. You say that big cities have too many happiness penalties but let's say you have a Amazon city with 20 population. Amazons benefit from Forests that provide production and food. So ideally every food and production sector should be terraformed into forest. Assuming the citiy also has 2 energy sectors that you don't want to terraform - then the happiness penalty is still only -8 (2x -4 from disliked).

In comparison the happiness penalty from 20 population is already -40. This penalty is not from the mod but from the base game, and obviously much bigger.

So, what terraforming does is that gives easier access to certain ressource types (EG Amazons can terraform arctic fertile plains into arctic forests to transform it into a strong production sector). It also disencourages players to get too many sectors with disliked terrain into one city. But it shouldn't in general penalize big cities.

Right now i dont play the mod, so here is what i remember:

So if you start say with Amazons you have the sectors your main city needs without penalty: food and production.
If you start with Assembly you have a penalty on every sector you need to get started and in most other citys too. Assembly does only benefit from ruins which are energy / research and for which you usually only need one or two city that are specialized at all.

This penalty translates "somehow" to you have to fill all the slots for happiness and still not having enough, as it is now i think of it as a racebased massive buff or debuff and for me this feels rather frustrating to have in it so i wonder:

i really have the feeling the idea behind the happiness system is not to balance races, so again what is really the concept?
What is the reasoning behind "disencourage players to get too many sectors with disliked terrain into one city" ?

The reason is mostly to make the factions more different. So for example Assembly is very effective with research and it's more often worth it to go for a tech focused start (trying to get T3 units as soon as possible). With Amazons that would be less viable (but of course not impossible).

For me It does not feel like making them more differently but more like forcing the player to a certain playstyle depending on the faction, its not like opening the game to more diversity but removing possibilitys.

There are other concerns also:
1) Diplomacy makes the game too easy, you can get literally hundreds of cosmite from trading contacts, AI is too peaceful even at the most aggressive level etc. so I have to disable diplomacy.
2) AI is worse than human player in tactical combat so I have to use difficulty mods.
3) Previous points mean I am attacked very early (turn 6 is my record, turn 15 is typical) and usually with much stronger army (otherwise AI does not even come in range)
4) To be able to survive this early attack I need to do 2 things:
a) have powerful army early so I need high upkeep and thus many colonies
b) have all my colonies connected, otherwise I can't defend them.I don't have luxury of going for the best places to settle, taking climate/terrain into account etc.
It results in something like this:
https://steamhost.cn/steamcommunity_com/sharedfiles/filedetails/?id=2817873564
It is turn 23, a single army protects all 4 colonies. AI invaded on turn 15, we played "cat and mouse" game for 5 turns where I was trying to make the AI retreat and the AI was almost in the middle of my territory threatening different colony every turn, neither of us dared to attack each other because of heavy losses. I kept adding mods and building more units in safe colonies. I had 6 energy and about 25 energy income if none of my colonies were converting production to energy. Then I had to move away to complete a running out of time quest so AI captured a colony on the north. My army liberated the colony a turn ago losing 2 units and guess what? Another AI army had just captured a sector on the south so I am moving there ignoring another quest again to make them run away. And I see the first AI brought another stack on the west.
If we add terrain unhappiness and increase colonizers cost, suddenly my workers spend their life in happiness slots, I have less colonies and I am doomed.

Yeah, with these conditions it's probably better to play with the compatibility mod. Personally, I usually play with less opponents and thus there's less early aggression. In this case it's possible to focus on optimizing the economy in the early game.