Nothing in Mundus works like things in our universe do. Things like the sun, magnetic fields, solar winds with electronically charged particles.. these things don't happen in Mundus. So what's causing the auroras in Skyrim?

Probably magic leaking into the world from Aetherius. Or souls leaving/entering Nirn.

Originally, in some of the http://images.uesp.net/8/81/SR-concept-6877561087.jpghttp://images.uesp.net/e/e9/SR-concept-6877562105.jpgat least, the aurora's were originally housing the words of power instead of the walls themselves, in a unusual twist. Not much more then that at anymore, but it was rather cool, and resembled boy Wulfharth looking to the sky and learning a new Thu'um when Shor battled Alduin.

Speaking of Shor, I personally think some of Sovngard's technicolor glory is leaking over the fatherland, but that's just me.

They are the magic leaking out of the cave in Snow-throat when Shor the mortal talked to his father Shor the god.

/Fan theory

There may be a more interesting answer, but I think it's pretty plain, that they're caused by aetherial magic burning through the darkness of Oblivion. I'd think that aurorae are similar to meteorites and "shooting stars", only they are only magic, not matter. They would thence be cause by magical particles (called kaleidocules) colliding with the boundaries of the Mundus. These particles originate from Magnus and the stars which we already know radiate kaleidocules (or leaky creatia) through Oblivion to Mundus. So when the kaleidocules collide with the Mundal boundaries, they may release their energy if the conditions are right.

Now what conditions are those? The main condition I can think of would be a clear sky for maximum exposure. And perhaps when the serpent is not visible, because it likes to swallow up leaky creatia with its unstars.

It's what's left of the Lunar Lattice after the Void Nights screwed up everything. I know this because reasons.

Contrails. Thalmor enforcement of the W-GC via Sunbird.