Not clear what's happening here, but sometime in the past few months it seems a windows upgrade broke the shadow copy mode. Regular backup mode works, but one can see this errror message in the log.
This MCSE note says:
If you're using an NTFS volume, try the steps listed below:Unfortunately, there's no such key in my registry. The closest one is "SystemSetupInProgress" and it's already set to 0.
Open Regedt32.exe and navigate to the following key:
Change the "UpgradeInProgress" value to 0.