Re : Cannot figure out why alpha is acting strange here!

Reading your code, taking notes...
- distanceBetween() duplicates the dist() function in Processing! Beside, no need for abs(), since you square the value anyway.
- You can use x += 4 as increment of the loop (instead of x++), that would avoid your x % 4 trick: you do 3/4 of the loops for nothing!

It is strange, because the halo's transparency works over the HeatPoint themselves, but not over the other halos.
I will think about a solution.
I tweaked your file before playing with it.

1. int numHeatPoints = 5;
2. HeatPoint[] heatPoints = new HeatPoint[numHeatPoints];
3.  
4. void setup(){
5.   size(1280,800);
6.   smooth();
7.   for (int i=0;i<numHeatPoints;i++){
8.     heatPoints[i] = new HeatPoint(random(0,width),random(0,height)); 
9.   }
10.   noStroke();
11.   rectMode(CENTER);
12. }
13.  
14. float[] colorPixel(float x,float y){
15.   float[] c = new float[4];
16.   for (int i=0;i<numHeatPoints;i++){
17.     float d = dist(x,y,heatPoints[i].x,heatPoints[i].y); // CPU intensive, better compute it once
18.     if (d < 200){
19.       float alph = map(d,0,200,175,0);
20.       c[0] = heatPoints[i].rgba[0];
21.       c[1] = heatPoints[i].rgba[1];
22.       c[2] = heatPoints[i].rgba[2];
23.       c[3] = alph;
24.     }
25.   }
26.   return c;
27. }
28.  
29. void draw(){
30.   background(0);
31.   //loadPixels();
32.   for (int i=0;i<numHeatPoints;i++){
33.     heatPoints[i].drawHeatPoint();
34.   }
35.   for (int x=0;x<width;x+=4){
36.       for (int y=0;y<height;y+=4){
37.           //pixels[y*width+x] = colorPixel(x,y);
38.           float[] c = colorPixel(x,y);
39.           fill(c[0],c[1],c[2],c[3]);
40.           rect(x,y,8,8);
41.       }
42.   }
43.   //updatePixels();
44. }
45.  
46. class HeatPoint{
47.   float x,y;
48.   float val;
49.   float[] rgba = new float[4];
50.   
51.   HeatPoint(float myX, float myY){
52.     x = myX;
53.     y = myY;
54.     updateHeatPointVal(random(0.0,1.0));
55.     println(val);
56.   }
57.  
58.   void updateHeatPointVal(float v){
59.     val = v;
60.     rgba[0] = map(val,0,1,0,255);
61.     rgba[1] = map(val,0,1,255,0);
62.     rgba[2] = 0;
63.     rgba[3] = 255;
64.   }
65.  
66.   void drawHeatPoint(){
67.     fill(rgba[0],rgba[1],rgba[2],rgba[3]);
68.     //fill(red(c),green(c),0,alpha(c));
69.     ellipse(x,y,255,255);
70.   }
71. }