As Genie Twilight stated to him at the end of the story, he’s already in his personal nightmare with Twilight who’s a genie and somepony of significant rank too.

Adding something like this would only make Twilight seem sadistic. Getting put behind bars with a straight jacket and not even one possible way for him to commit suicide is enough. It’s an elongated torture that doesn’t give the same satisfaction of immediate torture such as giving him constant nightmares like you’ve described. But over time it builds up and up and pretty much becomes a worser punishment because his own mind will end up keep reminding himself of his failure that he might as well have nightmares about it anyway. Or he could even dream about what would of happened had his plan succeeded only to wake up to the harsh reality of what really happened the next morning.