Piston clearance is the clearance or gap between the piston and metal cylinder, to avoid damage due to excessive expansion of piston on getting heated during combustion. It is also known as a piston to bore clearance.
Generally, the piston is made up of cast aluminium alloy for good thermal conductivity. On heating, aluminium expands more than the metal cylinder. So proper piston clearance is necessary to maintain free piston movement in the cylinder.
During the compression stroke, the air-fuel mixture ( for Otto cycle) or air ( for diesel cycle) is compressed. The highest pressure is achieved when the piston comes near the TDC. But absolute zero clearance is not recommended as the mixture requires it’s own space or volume for its existence.
Suddenly when the spark is produced ( Otto cycle) or diesel is sprayed ( diesel cycle), the mixture which is at high pressure and temperature try to expand completely in this small clearance volume which is small enough for expansion hence the piston is moved down hence the power is produced.
In petrol engines, the air-fuel mixture is compressed just below clearance volume (If the compression ratio is 9:1, then the mixture is compressed to 1/9th of total volume) and then sparked by the spark plug.