It all depends on where the the AI is running. The problem with the idea, is that for the majority of Windows boxes where it would be running do not have the bare metal hardware to support local models and thus it would be in the cloud and all of the issues associated with that when it comes to privacy/security. It would be neat, given MSFT's footprint, to look to develop small models, running locally, with user transparency when it comes to actions, but that doesn't align with MSFT's core objectives.
Five stars comment
AFAIK the existing Copilot features always use the NPU and do not fall back to the cloud. Given that Windows 12 will require an NPU I don't see why it would fall back either.