If you are using send-to-kindle, Amazon doesn't accept AZW3 books.
If you send-to-device while your PW is plugged in and connected to calibre, then click on the dropdown by "Device" in the toolbar, and select Configure Device. You will be able to select the formats compatible with your device (since the Kindle driver includes devices hat don't understand AZW3, it is disabled by default), and move them up in priority.
AZW3 is a newer format, and uses a slightly better rendering engine in miscellaneous ways, but it isn't really critical you use it. I like to, partly because of the rendering of hyphens across linebreaks, partly because it is a less lossy conversion, partly because I like newer stuff
.