After completing Chapter 2, you’ll get transported to the Interlude. If you have left the Interlude already, you can go back any time by starting Chapter 2. Immediately go to your left and drop down and go through the colored tunnel.
Move through the Interlude until you get to a room with 2 green power ups. Use the first power up (L1) to grab the second and move towards the room on your left. Now use your second green power up and move to the room above you. Now move all the way to the right until you get to the end of a bridge/platform and drop down. Now go down 2 rooms and you’ll see the challenge right below you. You’ll need to use the red power ups to jump from power up to power up, to the end, which is a gap in the ceiling that leads back to the room before the challenge.
Credit to: http://www.ps3trophies.org/game/knytt-underground/guide/
Credit to Mr Vuule for the video