Try to empty the software distribution folder and temp folder reboot your comp and try the upgrade again.
Yes. That is expected. If you want to upgrade you have to keep winre.wim. It's not impossible to remove it later. I also had that error in the past. I even asked @abbodi1406 at that time but I told there's no solution they are aware of.
Update: I have now also performed in-place upgrade using UUP dump file set, without any problems. OS upgrade: 22000.1817 => 22621.1635 ConvertConfig.ini: Cleanup=0 ResetBase=0 SkipWinRE=0 SkipISO=1 Spoiler: ConvertConfig.ini [convert-UUP] AutoStart =1 AddUpdates =1 Cleanup =0 ResetBase =0 NetFx3 =0 StartVirtual =0 wim2esd =0 wim2swm =0 SkipISO =1 SkipWinRE =0 LCUwinre =0 UpdtBootFiles=0 ForceDism =0 RefESD =0 SkipEdge =0 AutoExit =0 [Store_Apps] SkipApps =0 AppsLevel =0 CustomList =0 [create_virtual_editions] vAutoStart =1 vDeleteSource=0 vPreserve =0 vwim2esd =0 vwim2swm =0 vSkipISO =0 vAutoEditions= Replacing AppraiserRes.dll with the one from build 15063.0 bypassed TPM and Secure Boot checks and no other tweaks were needed (the hardware is from 2019 but it has MBR partitioned disks, which allows installing each instance of Windows 10 or 11 on a single partition).