Remove the engine cover and on the driver's end of the engine, look for a part with three plugs sprouting from the top as in this picture:
http://pics.tdiclub.com/showphoto.php?photo=30802&cat=500&ppuser=16933
On the back side toward the bottom of this part is the coolant temperature sensor. It has an electrical connection with a wire coming from the back side of it. It is held in place by a little plastic clip which can be pulled off toward the bottom of the sensor. Be gentle, the clip can break, and if you drop it, have fun looking for it. You will need it to secure the new sensor. Some folks suggest having a replacement available, just in case. The steps I followed when I replaced mine are as follows:
0. It is best to do this while the engine is cold.
1. Open the top of the coolant overflow container to relieve pressure.
1a. You will probably want to remove the large hose running from the airbox to engine. This will make access to the sensor easier.
2. Remove the electrical connection from the old sensor
3. Connect electrical connection to the new sensor, so if I drop it, it doesn't get lost.
4. Remove the retaining clip holding the sensor in place
5. Be sure you have the new rubber O-ring on the new sensor
5a.Remove the old sensor, being prepared for coolant to come out.
5b.Pull and twist the sensor, it should come out fairly easily.
5c.Check to be sure the rubber O-Ring came out with the old sensor
6. Quickly insert the new sensor with the new O-ring to prevent coolant from leaking
7. Re-attach the plastic clip to secure the sensor.
8. Check coolant level and, if necessary, top up with the recommended mixture of G12 coolant and distilled water. I used 50/50, although I don't think that is the exact recommendation. If you don't have G12 coolant use distilled water only.
9. Put top back on coolant overflow container.
10 Re-attach any other parts you removed.