Your idea in itself is good and the majority of it is plausible, however, it does feel like you're trying to force a backstory for Riddler behind the scenes of the other movies when there isn't one.
The bits I dislike the most is the waiting in the shadows and overhearing the coverup plot and giving the Joker the idea to blow up Rachel. Those bits just feel a bit too contrived. You're introducing what is essentially a new character into the franchise and rather than showing any character development into why he does the things he does, you seem to be going the "he was there all along, you just didn't see him" route. In doing so this actually weakens the Riddler character and those around him.
When the discussion for the demise of Harvey come about,Edward calmly walked up to Joker and said
"I have a good idea" That idea which the Joker liked so much, resulted in the death or Rachel and the scarring of Dent.
This actually takes something away from the Joker character. Firstly, I was under the assumption in TDK that once the mob hired the Joker, they just let him do his own thing so I doubt there would have been a discussion. Secondly, if anyone had walked up to the Joker and even suggested to tell him what to do, I imagine he would have put a bullet through their brain. So for the Joker to listen to the Riddler, agree with him and the carry out the plan seems a bit weak on the Jokers part IMO.
Edward tracks Harvey and follows him to where Rachel died. He was ready to open fire and kill Dent,but he couldn't. He could NOT bring himself to kill the man who ruined his life,that caused hell for him,by his own hand,but he WANTED to kill him. Shortly Gordon and Batman arrived and Edward watched from a far. He then (unfortunately) saw Dents death (becoming instantly angry that Batman has robbed him off his chance at revenge),and also heard the coverup plan,between Batman and Gordon!!! Edward left with full knowledge of everything!!!
This could have actually worked had Riddler been a character in TDK. However, seeing as he wasnt, it just feels that you put him there so that he can have the knowledge for when he actually appears. The "he was there all along, you just didn't see him" route didnt work out well in Spiderman 3 and I doubt it would work out well in Batman 3.
His costume? A black suit. A fedora hat,not bowler. And an olive green overcoat. He has riddles written in words and question marks all over his coat. They symbolise the mystery he is to himself and too others. His final riddle to Batman?
"What Is Reason Behind The Enigma Of The Riddler?"
If he went out wearing that coat in reality, he would be spotted and arrested in no time. If no one noticed him, it would be like superman running out into a packed street and tearing open his shirt to reveal the big S with no one batting an eyelid. Suspension of disbelief only goes so far. Saying that, he might get away with it so long as he avoids people whilst wearing the coat. I just think the Riddler would be more subtle.
Overall, your idea has some good points just don't go the "he was there, you just didn't see him" route.