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The Aurora Borealis, more commonly referred to as the Northern Lights is a natural phenomenon created when particles emitted by the sun interact with the atmosphere in the Earth's magnetic field. This releases energy, causing peculiar luminous green streaks across the skies.
On clear winter nights, sightseeing trips are organized around this spectacular—though fickle—natural phenomenon. The ideal location for sightings varies and excursion leaders are skilled in "hunting" the lights, finding locations where conditions are best for seeing them on any given night.
There are no guarantees that you will see the Northern Lights during your stay, but in most cases, sightings are immediately improved outside populated areas, especially away from the light-pollution of the capital. A number of hotels in the countryside offer special Northern Lights wake-up service. https://www.inspiredbyiceland.com/things-to-do/activities/northern-lights/