The way the Northern Light or aurora works is a lot like a neon sign, except that in the aurorae the conducting gas is in the ionosphere, instead of a glass tube, and the current travels along magnetic field lines instead of copper wires.
The power source for aurorae is Solar Wind. The Earth's magnetic field looks a lot like the magnetic field of a bar magnet with field lines going into and out of the Earth's magnetic poles, where the magnetic field is strongest. Solar Wind from the Sun is always pushing on the Earth's magnetic field (the magnetosphere), deforming and stretching it into a long leeward tail like the wake of a ship, which is called the magnetotail The aurora happens when energetic particles (protons and electrons) from the Sun enter the Earth's magnetosphere and are captured in the magnetotail. When disturbances occur in the Solar Wind or there is an energetic Solar Flare, the particles are accelerated along the field lines, becoming more dense near the magnetic poles and eventually precipitating into the Earth's ionosphere. As they hit the ionosphere the particles will inevitably collide violently with gas atoms. This adds energy to the gas atoms which in turn will release light and more elec trons - the ionosphere starts to glow!
The different colours in an aurora are depending on the distribution of different gases at different altitudes. Very high in the ionosphere (above 300km) oxygen is the most common gas resulting in reddish colours when exited. Other gases like nitrogene and helium produce blue or purple colours.