How do SETLOCAL and ENABLEDELAYEDEXPANSION work?

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I think you should understand what delayed expansion is. The existing answers don’t explain it (sufficiently) IMHO.

Typing SET /? explains the thing reasonably well:

Delayed environment variable expansion is useful for getting around
the limitations of the current expansion which happens when a line of
text is read, not when it is executed. The following example
demonstrates the problem with immediate variable expansion:

set VAR=before
if "%VAR%" == "before" (
    set VAR=after
    if "%VAR%" == "after" @echo If you see this, it worked
)

would never display the message, since the %VAR% in BOTH IF statements
is substituted when the first IF statement is read, since it logically
includes the body of the IF, which is a compound statement. So the IF
inside the compound statement is really comparing “before” with
“after” which will never be equal. Similarly, the following example
will not work as expected:

set LIST=
for %i in (*) do set LIST=%LIST% %i
echo %LIST%

in that it will NOT build up a list of files in the current directory,
but instead will just set the LIST variable to the last file found.
Again, this is because the %LIST% is expanded just once when the FOR
statement is read, and at that time the LIST variable is empty. So the
actual FOR loop we are executing is:

for %i in (*) do set LIST= %i

which just keeps setting LIST to the last file found.

Delayed environment variable expansion allows you to use a different
character (the exclamation mark) to expand environment variables at
execution time. If delayed variable expansion is enabled, the above
examples could be written as follows to work as intended:

set VAR=before
if "%VAR%" == "before" (
    set VAR=after
    if "!VAR!" == "after" @echo If you see this, it worked
)

set LIST=
for %i in (*) do set LIST=!LIST! %i
echo %LIST%

Another example is this batch file:

@echo off
setlocal enabledelayedexpansion
set b=z1
for %%a in (x1 y1) do (
 set b=%%a
 echo !b:1=2!
)

This prints x2 and y2: every 1 gets replaced by a 2.

Without setlocal enabledelayedexpansion, exclamation marks are just that, so it will echo !b:1=2! twice.

Because normal environment variables are expanded when a (block) statement is read, expanding %b:1=2% uses the value b has before the loop: z2 (but y2 when not set).

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