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When Python starts running we (getpathp.c) looks in the registry for its library directory. To avoid this, you can set PYTHONPATH and PYTHONHOME environment variables, but this isn't always easy if you've copied Python into your app's directory.
We should look for a python35.ini alongside python35.dll when initializing and extract values from it. Possibly this could just be an [Environment] section with key-value pairs to set before loading.
This would ensure that app-local Python installations never look for a global install in the registry. (As an aside, for the 3.5 beta we'll be shipping an app-local "installer", which will make this situation easier to end up in, but it also has value for xcopy installs.)