A very useful analogy for thinking of electrical energy transfer is that of water flowing in pipes. Think of voltage as the water pressure in a pipe, and the electrical current as water flowing though the pipe. From experience you know that you can have water pressure in a pipe without having any flow, as this is the case at every closed water tap.
For the sake of simplicity let's think of the generator in your question as a direct current (DC) generator. The electrical current it produces flows only one way.
Consider the situation if instead of turning an electrical generator, your engine was connected to a centrifugal water pump. The pump has a water inlet and an outlet, and when turning the pump lowers the pressure in the inlet pipe (sucks water in) and raises it in the outlet pipe (pushes water out), so you have a pressure *differential* (difference) between the inlet and the outlet. This is the same as the voltage difference between the positive and negative terminals of your generator.
If there is a connection between the two pipes, water will flow from the high pressure outlet to the low pressure inlet, but even if the outlet pipe ends in a closed valve, the pump is still creating pressure in the outlet pipe. There is the *potential* for water to flow, but only pressure, no flow, no current.
So what is the engine busy doing if there is no flow? Well, you know that most machines are not 100% efficient. Some portion of the energy put into the machine is dissipated in things like friction. Reciprocating engines are notoriously inefficient, and in fact MOST of the energy stored in the fuel being burned is simply turned into heat and thrown away into the air.
The only portion of the fuel's energy that even has a chance at being used is that converted into motion of the piston and crank shaft, and even much of that is lost to mechanical friction. The majority of the rest of the energy is simply blown out the exhaust pipe as hot gasses. Consider that the engine is taking in air and fuel at room temperature, but blowing out exhaust at around 1000 degrees F. A large part of the energy in the fuel was consumed in simply heating the exhaust.
Before leaving the exhaust pipe, those hot exhaust gasses are in contact with the cylinder walls, valves and the exhaust pipe itself. The temperature of these objects soar, and unless we want them to melt, we must remove heat as fast as it is put in. To remove the heat, we blow air on the parts (air cooled engines) or surround them with flowing water (water cooled engines) but since a radiator is used to cool the cooling water, eventually all the heat is dumped into the air. Think of this: If your gasoline engine was anywhere close to 100% efficient, the exhaust coming out would be the same temperature as the air and fuel going in, and there would be no fan or radiator!
So the short answer to your question is heat. If you are running a generator but not using the electrical voltage to make electrical current and do work, all of the energy in the fuel being burned is being dumped as hot air and exhaust.
