Spectral clustering with heat kernel weight matrix
$\sigma$ represents a typical distance between points. If all points of one cluster of your graph are separated from all points of another by a distance that is significantly higher than $\sigma$, then the spectral clustering will probably use this as a cut.

If you already know the number of clusters (or cuts) that you want to make, $\sigma$ does not need to be tuned very finely. But it becomes really important if you have no idea how many cuts you want to make.

A good approach is to make a parametric study over $\sigma$, and make the decision through the eigen values. Here's an example from one of my study cases, giving eigen values (in ascending order) of the Laplacian matrix, for 4 different values of $\sigma$:



What you are looking for is a break in the increase of eigen values: theoritically, a wide gap between two consecutive values ($n$ and $n+1$) should tell you that it is a good idea to make $n$ clusters.

As you can see, small sigma values (upper left plot) lead to very low eigen values, sometimes even numerically negative. Very small values tend to make very small clusters containing outliers, and a very big cluster with all other points. High sigma values (lower right plot) will make your matrix look like the identity, with high eigen values, this usually won't bring anything interesting.

What I usually do is try a wide window for sigma values, and shorten the range progressively, until I find a satisfying result. This is all graphical, and depends on the prior knowledge about your problem (how many clusters do you approximately expect? 2, 10, 100?).

Eigen values represent the quality of the cut. Small values correspond to very distant clusters. For instance, in my upper right case, I could make 4 very well separated clusters (first 4 eigen values are almost 0). The next cut (to reach 5 clusters) would be less effective than the 3 previous ones. 13 clusters could also have been a good try. But I actually selected 9 clusters, because it was closer to what I actually expected.