SQL Server Express and IIS: Failed to generate a user instance of SQL Server due to failure in retrieving the user's local application data path.

SQL Express user instancing fails with the default IIS 7.x configuration. To solve this you can do the following:

1. Create new application pool in IIS
2. Open Application Pool Advanced settings
3. Change Identity from ApplicationPoolIdentity to NETWORK SERVICE and confirm
4. Change the application pool that the web application belongs to by opening Advanced setting of the web application