Blocks that do not receive light are in a dim shadow that remains at the same level of brightness no matter how far they are from a light source. It passes through transparent blocks to light blocks underneath. 'Sunlight' is emitted by the top edge of the map and hits any block that is under it, regardless of distance.
At the top of the map, grass will generate on all fully lit tiles. The higher the Y level is, the more chance there will be of grass generating.