One is confused in two ways by the lights (5)

'lights' is the definition.
(I've seen this in another clue)

'one is confused in two ways by' is the wordplay.
'two ways' can mean two substitutions for 'way'.
'is confused' is an anagram indicator.
'in' indicates putting letters inside.
'way' becomes 's' (Compass direction - South).
'way' becomes 'n' (Compass direction - North).
'by' says to put letters next to each other.
'one' is an anagram of 'eon'.
's' put after 'n' is 'ns'.
'eon' going within 'ns' is 'NEONS'.

'the' acts as a link.