I have never tried it but you can probably curl the chip(to fit) and use a smaller battery with the same voltage.
First of all: HOLY CRAP THAT IS AN AWESOME PRIZE!
Second: Elvisgump, from the sound of things you're trying to make as close a replica of Smith's sonic as you can, and that's not what the contest is about. I may be wrong, though.
1) elvisgump -- Go ahead and enter your sonic, as long as you aren't lathing an exact replica then you are fine.
does it need to have electronics or can it be just a model?
It is not required to have electronics, a static model is just as good.