First of all, be sure you have read the Getting Started chapter.
A configuration is a freemarker.template.Configuration object that stores your common (global, application level) settings and defines variables that you want to be available in all templates (so called shared variables). Also, it deals with the creation and caching of Template instances.
An application typically should use only a single shared Configuration instance. More precisely, typically you should have one Configuration instance per independently developed components (like projects, modules, etc.) that internally use FreeMarker, as each should create its own instance.
As running templates are influenced by the configuration settings, each Template instance has a Configuration instance associated with it, via the corresponding Template constructor parameter. Usually you obtain Template instances with Configuration.getTemplate (not by directly calling the Template constructor), in which case the associated Configuration instance will be the one whose getTemplate method has been called.