This is probably a documentation failure more than anything else. We're in the middle of redesigning initialization though, so it's good timing to contribute this feedback.

The short answer is that you need to make sure Python can find the Lib/encodings directory, typically by putting the standard library in sys.path. Py_SetPath clears all inferred paths, so you need to specify all the places Python should look. (The rules for where Python looks automatically are complicated and vary by platform, which is something I'm keen to fix.)

Paths that don't exist are okay, and that's the zip file. You can choose to put the stdlib into a zip, and it will be found automatically if you name it the default path, but you can also leave it unzipped and reference the directory.

A full walk through on embedding is more than I'm prepared to type on my phone. Hopefully that's enough to get you going for now.