The key point here is that your conciosness deals only in memories, the models of things. When you see something you know, the model of that thing is applied to your conciousness. This is why I say that the sensory part of the brain guides conciousness. When you are awake, the models or memories that are being applied to your conciousness are being picked out by your sensory part. When you conjur a memory, you are yourself selecting a model or memory to apply to your conciousness.
When you dream, this is kind of reversed. The part of the sensory interface that actually applies the memory is turned down, which leaves only your conciousness to do selection. This means that sensory information is only vaguely applying memories to your conciousness (alarm interpreted as in-dream sound, etc) and memories or models that are selected by conciousness itself are applied fully, in incredible detail and vividness. The exact opposite as the wakeful mind.
So the result is that conciousness only deals in it's models. Sensory organs only create models or choose models.
This explains many things. Lucid dreams are explained. Sleep paralysis is also explained. The loss of memory during dreams is explained. False awakenings are explained.