What was going on
On Windows I cloned a minimal Encore repro and ran yarn start, which died with The ENCORE_RUNTIME_LIB environment variable is not set. The runtime binary couldnt be located because I was starting the app with plain node instead of the Encore tooling. Another user hit the same error running npm run test with vitest. A maintainer answered on the thread, and the issue was closed in April 2025.
What fixed it
ENCORE_RUNTIME_LIB points Encore at its native runtime binary, and when you launch with plain node or npm run test the variable is never set. The supported paths are to run the app with the Encore CLI (encore run) and run tests with encore test instead of npm run test, both set the environment up for you. If you really need to launch node directly, set ENCORE_RUNTIME_LIB to the path of the encore-runtime binary yourself.