"How do I offer free shipping for local pickup ?"

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Short Answer:

You can either create a free shipping method, or a promotional code to do this.

Detailed Explanation:

1. To create a free shipping method, go to your shipping settings, and create a new manual method, and set the price to 0.00.  Give it a name like "Local Pickup Only"  This is probably the best option for most people, however, there is always the risk that a shopper will choose this method, even though they do not plan to pick it up.
2. The alternative is to use a promotional code (under the marketing tab.  Of course, you would just call it "Free Shipping" or whatever you wanted, then setup the rules as needed.