The add-on never claimed to support local files. Local file:// URLs do not work because of security restrictions imposed by Mozilla. I've updated the description to make this clear.

Thanks for your review.

Unfortunately this is not something that can be fixed.
The way this addon avoids changing the address bar content is by creating an iframe and displaying your chosen site in that iframe. The problem is that sites (like Google) can set an HTTP header that blocks other sites (like this addon) from displaying their pages inside an iframe.
If you look in the addon options page, next to where you choose the URL, it does warn you about this by saying "The site must allow iframe embedding or it won't work".

However, in your case, I don't really understand the use case for having google.com as your new tab page if you can just search straight from the address bar? Maybe Firefox address bar "smart keywords" would work better so you could just type something like "img my icon" in the address bar and be taken straight to the Google image search results for "my icon". Here's a Firefox post about using "smart keywords" if you're interested https://support.mozilla.org/en-US/kb/how-search-from-address-bar.

Thanks for your review.
I've updated step 1 in the instructions which should hopefully make it a bit clearer.