How does the new "local snapshots" feature of Time Machine in Lion work?
I haven't found any documentation for this feature yet, so I don't have any specific answers for your questions about interactions with external Time Machine drives.

However, I did do some playing around with the feature while using my laptop on battery.  The first thing I noticed is that local snapshots were not enabled by default – for me, at least. I know that because "entering" Time Machine while my backup drive was detached resulted in the usual error message — until I executed the following from a command line:

sudo tmutil enablelocal


After I did this, a hidden volume called MobileBackups was created (in /Volumes) and I was able to "enter" Time Machine. (Perhaps local snapshots weren't enabled on my machine because I have less than 10% free disk space?)

Unfortunately, the feature seems a little half-baked. I tried the following, with pretty unsatisfactory results:


Created a new folder, ~/Documents/Test.
Forced a new snapshot by running tmutil snapshot.
Verified that a new snapshot was created by looking in /Volumes/MobileBackups/Backups.backupdb/hostname/Latests/drivename/Users/myname/Documents.
Deleted the Test folder.
Entered Time Machine and browsed the backups/snapshots. The Test folder was not there in any of the backups.


Update: I installed Lion on a second Mac, and without any explicit action on my part, this Mac has a MobileBackups volume. And restoring deleted files from a local snapshot works on this Mac.