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I just did a test on my Windows 11g environment using localfile and it worked fine.
If not testing in the server itself (where reports server is running) then test it there and see behavior.
"LocalFile" surely works on the Application Server. But, if i run a report from the client machine using LocalFile the output is not saved on the local disk of the client machine.
Saving the file directly on the client machine is my concern.
Thanks for the confirmation that localfile does work on server.
Please enable reports server trace (TRACE:32) and try again. Check rwserver and engine trace files for further details and let me know.