Gah, ignore the rest of this answer. The registry key you have there is useless. It won't change anything with your shell folders. Heck, there is even a value there:
You see, The reason that that key existed and shell folder locations were stored in the registry is that they initially were stored there. But since there was a documented way to get at them this was an implementation detail. Explorer might still update those values for you as a convenience since a great many applications are incorrectly relying on that key but you should never use it, anyway. Back to the topic, since this is just a static list reflecting (or not) what Explorer stores elsewhere changes there won't affect the systen in any way. Explorer simply doesn't care about it. Image you write where you are on a slip of paper every time you go somewhere. Do you magically pop up in another location when someone else writes on that paper?
As for REG_SZ to REG_EXPAND_SZ: Try it, but don't assume that it will magically work. The registry itself doesn't care about REG_SZ and REG_EXPAND_SZ–that's all done by the application reading the data. And since this value is a REG_SZ I'm guessing that you can't just replace it with REG_EXPAND_SZ and have it work.