What is the flaming city seen in the distance from the lighthouse?

When you are walking up the lighthouse at the beginning of the game, if you look out a window or look at a certain direction from the top you can see a flaming city.

What exactly is this? Is it explained later and I missed it? Any insight is helpful.

Solution 1:

Probably, you're referring to this city in the distance:

Effectively, the lights may look like the city is on fire. If you see the same scene from the top of the lighthouse though you'll have a different perspective:

As you can see from here, it just looks like these are cities in the distance, with their pretty city lights.

So my guess is that there's nothing on fire, it's just that the lights aren't optimised for looking through the lighthouse windows.