Question

What happens to the energy that is "lost" from the generator?

it is unusable
it is destroyed
it is converted into electricity

Answer 1

Neither destroyed nor converted into useful electricity. By the conservation of energy, the "lost" energy is converted into other forms — mainly waste heat (I²R losses, friction, eddy currents, hysteresis), plus some sound and vibration — which are typically unusable for the generator's intended work.