Currently it's not possible to connect/create an embedded knowledge base on Jira Service Management Sandbox. If you try to connect it shows error message:

We're unable to add Confluence
This is a sandbox instance. Go to Atlassian Admin to add a new product to your organisation.

It would be great to allow JSM to connect to Confluence on the same Sandbox site, so that user can try on test environment before release to their production.

Workaround

As detailed on Understand how to add knowledge to your service project, there are two connection setups Embedded knowledge base and Confluence:

Picking the second option will allow you to connect the JSM sandbox project to a Confluence space, however only to a separated site under the same organization, meaning you cannot connect a JSM Project to a Confluence Space under the same sandbox site.