It uses heat and supersonic speeds to simulate the energy experienced by a vehicle reentering the Earth's atmosphere. Various materials are tested to see if they provide effective thermal protection. The arc jet sustains a standing bolt of lightning that heats the air up to 15,000 degrees Celsius. You can think of it as similar to a welding torch. There is a huge arc of electrical energy that jumps across a gap between two conductors.
Air is blown through the lightning bolt and it gets heated up.
The air is actually stored at high pressure to achieve supersonic speeds. The air is released once the arc is started. The air, heated by the arc, expands through a nozzle which connects to a vacuum chamber. This chamber is pumped by a building-sized vacuum pump, one of the largest in the world. As the hot air moves through the nozzle, it expands, cools, and accelerates, just like water through a garden hose.