there's 2 ways in which high temps reduce power.

1) lower density.

that means for the a given engine size, say 2 litres, with an assumed volumetric efficiency of 100%, the engine will always get 2 litres of air into it.

at a cold temperature, 2 litres of air has a mass of say 200g (that's just a figure plucked from thin air). to get the air to fuel ratio right, of 14 parts air to 1 part fuel by weight, that means a mass of about 15g of fuel. there is a certain amount of energy that can be extracted from that fuel that will give a certain power.

increase the temperature, and the density comes down. now 2 litres of air may only way 150g, to which you only need to add 10g of fuel to keep the same AFR. 10g of fuel can obviously release less energy than 15g.

2) detonation

a hotter mixture of air/fuel will burn easier than a cold one. to prevent that happening uncontrollably, the spark has to be retarded to later in the cycle, which means getting less energy out of the mixture

hope that helps