TL;DR: Cluster validation fails its Network test because the IMDS / "Azure Benefits" host adapter uses the same link-local IP (169.254.169.253) on every node by design. Add that adapter to the cluster's exclusion list so validation skips it, then re-run cluster validation and Update Readiness.

Recommended action:

The IMDS adapter (AZSHCI_HOST-IMDS_DO_NOT_MODIFY) is platform-managed and must not be renamed, re-IP'd, or removed. Instead, exclude it from cluster validation.

  1. Confirm the adapter and its address on each node:

    Get-NetAdapter -Name "*IMDS*" | Format-Table Name, InterfaceDescription, ifIndex
Get-NetIPAddress -IPAddress 169.254.169.253

  2. On Azure Local 24H2 and later, add the adapter to the cluster exclusion list using the cluster cmdlets (applies cluster-wide):

    Add-ClusterExcludedAdapter -ExclusionType FriendlyName -Value "AZSHCI_HOST-IMDS_DO_NOT_MODIFY"
Get-ClusterExcludedAdapter -ExclusionType FriendlyName

    See the Get-ClusterExcludedAdapter reference for exact Add/Set/Remove syntax and the IPPrefix / Description exclusion types: https://learn.microsoft.com/en-us/powershell/module/failoverclusters/get-clusterexcludedadapter

  3. On 23H2 / Windows Server where those cmdlets are not available, set the exclusion in the cluster service registry key on each node instead:

    $key = "HKLM:\SYSTEM\CurrentControlSet\Services\ClusSvc\Parameters"
New-ItemProperty -Path $key -Name "ExcludeAdaptersByFriendlyName" -Value "AZSHCI_HOST-IMDS_DO_NOT_MODIFY" -PropertyType String -Force

    You can alternatively exclude by ExcludeAdaptersByDescription, or by ExcludeAdaptersByIPPrefix with value 169.254.169.

  4. Delete old validation reports from C:\Windows\Cluster\Reports\, then re-run cluster validation (Failover Cluster Manager → Validate Cluster, or Test-Cluster). Confirm the Network category passes, then re-run Update Readiness (Get-SolutionUpdateEnvironment).

Why:

The ...-IMDS_DO_NOT_MODIFY adapter is the host-side IMDS ("Azure Benefits") interface. It is assigned the same link-local address on each node intentionally, and it is not part of a Network ATC intent. Cluster validation's Network test sees the identical IP on multiple nodes and reports it as a duplicate — for example, "Found duplicate IP address 169.254.169.253 on adapter AZSHCI_HOST-IMDS_DO_NOT_MODIFY" — which fails the Network category and blocks update readiness. Excluding the adapter tells validation to skip it, clearing the failure without changing anything on the adapter itself.

Going forward:

Keep the exclusion in place permanently — the adapter is platform-managed. Re-run cluster validation after adding it to confirm a clean Network result before each update cycle. Note that some newer deployments may not use the Azure Benefits connection method at all; if the adapter is not present, this scenario does not apply.

Optional details:

The exclusion list supports three match types — friendly name, interface description, and IP prefix — stored under HKLM:\SYSTEM\CurrentControlSet\Services\ClusSvc\Parameters (ExcludeAdaptersByFriendlyName, ExcludeAdaptersByDescription, ExcludeAdaptersByIPPrefix). Excluded adapters are omitted from Test-Cluster, so validation no longer evaluates their addresses for duplicates.