What does it do? In short, they are AdSense ads designed for search results pages. But isn't there already an AdSense for Search? There is, but the ads here differ in that they are based off your site's search queries and not directly off the context of your pages.
How are these better? Google said:
- Custom Search Ads uses the search query to deliver highly targeted, relevant ads. The result is satisfied users and more revenue.
- Leverage the expertise and unique ad formats found on Google while accessing our partner network of over one million advertisers.
- Custom Search Ads can be customized to the look and feel of your site. Size, location, color and font are all in your control.
Honestly, I do not see the full differences between the two products. I.e. the one Google launched in 2008 and this one. I always felt the AdSense for Search ads were from the queries not the context. So this is very confusing to me. Yes, there are some added features here but how it is more relevant?
For more information and to get started, see this page.
Forum discussion at WebmasterWorld.
Update: Google sent me a crystal clear explanation and here it is:
AdSense for Search is tied to a Custom Search Engine for the publisher's site: it offers a search box, along with search results and ads. Custom Search Ads do not offer a search box, they only return ads (that are customized by the publisher).