What is Rails Engine?

You should find everything you need to know on the rails engines website: http://rails-engines.org.

In a nutshell, there's a plugin (the 'engines' plugin) that enhances the existing plugin system so you can easily put views, controllers, routes, migrations and so on in plugins. It's best used to share home- crafted chunks of functionality between your own applications, so you don't have to reinvent or maintain multiple, say, authentication systems.

In the past, folks have refered to plugins that rely on the engines plugin as "engines" themselves, but really, there's no difference, it's just that when the engines plugin is installed they are a bit more powerful.