How do 'template settings' work?

If you think about how skin settings enable you to change your site globally, then consider that template settings enable you to change things locally - on a 'drilled-down' view if you prefer.

As Tank's data-types - pages, posts and photos - are tied to templates, there are now settings available to each of these templates on a page, post or photo level.

Where can I see this in action?

On most pages there are additional variables available: for instance you can now change a code variable on a page by page level - adding granular CSS to change how a specific page looks.