Disappearance:
The heart of Lorkhan turned rock to lava when it landed in Vvardenfall, creating Red mountain. This shows the awesome power of the heart -- it is capable of fueling a volcano for ever. I believe that Kagrenac managed to succeed in aiming the power of the heart at the Dwemer, but miscalculated the outcome. He thought the power would be given to them, but instead it was pointed at them like a gun. The force burned them alive in an instant, leaving those piles of ash you find on the floor of their ruins.
Energy sources:
You can't disagree with most of what Harold Trontskii said in the Dwemer energy study (http://www.imperial-library.info/fsg/tsbasiliskarticle1.shtml) said. however, I differ from him on some points. It is possible that the Dwemer discovered an energy source that, after being burned, would recondense into a re-light-able source of energy. The Dwemer used this to constantly re-boil the steam in their golems. Steam Centurions -- who leak steam -- constantly gather more, while other Animunculi are water tight. It is also possible that Dwemer discovered the way to turn steam energy into mechanical energy, and that into electrical energy. Although a massive stretch, it explains their lights as well as their massive steam turbines.