Let’s talk about your questions one by one.
The S-Parameter element in this example indeed is a grating coupler model. The grating coupler s-parameter (the grating coupler simulation data) is loaded into this element. For more information about how to use and define the S-Parameter element, please have a look at this page: Optical S-Parameter (SPAR)
The effect of this S-Parameter element equals to add a grating coupler in front of the the waveguide. Which adds some loss in the circuit and curve shapes the spectrum a little bit. It is a regular grating coupler effect.
You can modify this ‘Waveguide -> modes’ property to reflect the mode you are using in the S-Parameter element. However, the actual mode you are using is defined by the data (the .dat file, which is grating_S.dat) you load into the element. Only changing the label won’t change the data file. If you want to use TE mode grating coupler, you can either re-run the FDTD simulation and get the TE mode data, or you may be able to find some experimental data online, as long as it fits your simulation requirement.
I hope this could help you understand this element more. I also strongly recommend you to take a look at the INTERCONNECT introductory webinar video, it talks about some basics about INTERCONNECT