VM1: The Tier -
The Tier needs to be upgraded to standard.
Disk Encryption for Windows and Linux IaaS VMs is in General Availability in all Azure public regions and Azure Government regions for Standard VMs and VMs with Azure Premium Storage.
VM2: The type -
Need to change the VMtype to any of A, D, DS, G, GS, F, and so on, series IaaS VMs.
Not the operating system version: Ubuntu 16.04 is supported.
References:
https://docs.microsoft.com/en-us/azure/security/azure-security-disk-encryption-overview
https://docs.microsoft.com/en-us/azure/security/azure-security-disk-encryption-faq#bkmk_LinuxOSSupport