I think they are saying a few different things:
1) Your app should not keep trying to get location data if the functionality of your app doesn't need continuous location tracking. For example, lets say you make a camera app and you want to embed the location when the picture was taken in the meta data of the image. It sounds like Google is OK with collecting location data for that one time when the picture is taken. But once the picture is taken, your app shouldn't continue to obtain location info.
2) Google will also be OK if your app obtains continuous location data as long as your app needs continuous location tracking to provide the main feature of your app. For example, if your app provides real-time driving directions, then it is ok to obtain continuous location tracking.
3) Also, if your app is obtaining location data in the background, then it better have a good reason to do so. For example, if you have a hiking app that records the route the user walked to get somewhere, then that use of background location tracking is OK because if the user switches to their music app, your app still needs to track the location in the background so that the tracked route will be a continuous line and not have missing gaps in the route of when the user switched to using a different app on the device.
4) Google also doesn't want you to obtain location data that has a higher accuracy then what your app actually needs to provide a feature in your app. For example, If your app shows the nearest mcdonalds, then your app does not need to obtain FINE_LOCATION to know the exact house the user is located in. It can just as easily use COARSE_LOCATION accuracy for the main purpose of showing where the nearest mcdonalds is.
My take on this policy update is that, basically, for your app to be OK to use location data, your app should only request the bare minimal location data that it absolutely needs to provide the significant feature of your app.