On SQL Server 2008 R2 Standard Edition, I created a credential TestCredential with identity as NT AUTHORITY\NETWORK SERVICE as explained here. Then I followed this article to create a proxy account and a SQL server job using that proxy account. But when I run the job, I get the following error:
Unable to start execution of step 1 (reason: Error authenticating proxy NT AUTHORITY\NETWORK SERVICE, system error: Logon failure: unknown user name or bad password.). The step failed.
Error's content tells you everything. You create credential for service account without password which is required to do this. If you go to the "Credentianals" section you will find this credential with password which is wrong for this account. In conclusion you can not use service accounts as a credential. Their role is to service "handling".