The correct explanation for why each level of the energy pyramid is smaller than the level directly below it is:
Because 10% of the energy at each level moves to the next level and some additional energy is converted to heat.
In an energy pyramid, only about 10% of the energy from one trophic level is transferred to the next level above it. The remaining 90% is lost primarily through metabolic processes, such as respiration and heat production, and is not available for the next trophic level. This results in a reduction of energy (and consequently biomass) at each successive level in the pyramid.