First of all, this is my third question on the similar topic.. and still I have no answer, maybe only approaching it (see first, second).
My web application (ASP.NET MVC
As my machine on which this works has the same value in enviroment page of process hacker, and still
Environment.GetFolderPath(Environment.SpecialFolder.LocalApplicationData)
has value of my user appData, and I have SP1, I think that it should not be related to it, but to something in your configuration that could have been changed. Check if your inetmgr has properly set identity for your application. Open C:\inetpub\temp\appPools\yourAppPoolName\yourAppPoolName.config and check if this setting exists:
....
...
If not, you can configure it there (put password in plain text or you can configure it using inetmgr like I described in my answer to your other question).