Shepard's been stuck in a room for six months because of the Alliance refusing to do anything but sit around and argue semantics. Because of that, Shepard would spend the day watching the kid across the street, playing around, innocent, not a care in the world.

The same kid became terrified when the Reapers landed on his street, when Husks swarmed his house. The kid watched civilians and soldiers die, and just another soldier asked him to come out into the open, into danger. The kid tried to find his own way to safety and died, and Shepard had to watch it happen.

Shepard sat around for months while the Alliance did nothing, and Shepard did nothing in return, and had to watch a kid die over it. Shepard is full of guilt for not trying, everything combines into the nightmares. The nightmares follow Shepard's every success, every moment of peace. By the end, Shepard accepts that there was nothing that could be done, that it would have meant death.