diff --git a/.changeset/tricky-clouds-wait.md b/.changeset/tricky-clouds-wait.md
new file mode 100644
index 0000000000..5a28f94fa7
--- /dev/null
+++ b/.changeset/tricky-clouds-wait.md
@@ -0,0 +1,5 @@
+---
+'@backstage/config-loader': minor
+---
+
+Support parameter substitution for environment variables
diff --git a/docs/conf/writing.md b/docs/conf/writing.md
index 48104699c7..6e827c075e 100644
--- a/docs/conf/writing.md
+++ b/docs/conf/writing.md
@@ -199,6 +199,18 @@ configuration value will evaluate to `undefined`.
 The substitution syntax can be escaped using `$${...}`, which will be resolved
 as `${...}`.
 
+Parameter substitution syntax (e.g. `${MY_VAR:-default-value}`) is also
+supported to provide a default or fallback value for a given environment
+variable if it is unset, or is declared but has no value. For example:
+
+```yaml
+app:
+  baseUrl: https://${HOST:-localhost:3000}
+```
+
+In the above example, when `HOST` is unset or has no value, it will be
+substituted with `localhost:3000`.
+
 ## Combining Includes and Environment Variable Substitution
 
 The Includes and Environment Variable Substitutions can be combined to do
diff --git a/packages/config-loader/src/sources/transform/substitution.test.ts b/packages/config-loader/src/sources/transform/substitution.test.ts
index ff1c02174b..f7645c3cc4 100644
--- a/packages/config-loader/src/sources/transform/substitution.test.ts
+++ b/packages/config-loader/src/sources/transform/substitution.test.ts
@@ -55,6 +55,12 @@ describe('substituteTransform', () => {
       applied: true,
       value: 'hello my-secret',
     });
+    await expect(
+      substituteTransform('hello ${SECRET:-default-secret}', { dir: '/' }),
+    ).resolves.toEqual({
+      applied: true,
+      value: 'hello my-secret',
+    });
     await expect(
       substituteTransform('${SECRET      } $${} ${TOKEN }', { dir: '/' }),
     ).resolves.toEqual({ applied: true, value: 'my-secret ${} my-token' });
@@ -64,6 +70,24 @@ describe('substituteTransform', () => {
       applied: true,
       value: undefined,
     });
+    await expect(
+      substituteTransform('foo ${MISSING:-}', { dir: '/' }),
+    ).resolves.toEqual({
+      applied: true,
+      value: undefined,
+    });
+    await expect(
+      substituteTransform('foo ${MISSING:-default-value}', { dir: '/' }),
+    ).resolves.toEqual({
+      applied: true,
+      value: 'foo default-value',
+    });
+    await expect(
+      substituteTransform('foo ${MISSING:-default:-value}', { dir: '/' }),
+    ).resolves.toEqual({
+      applied: true,
+      value: 'foo default:-value',
+    });
     await expect(
       substituteTransform('empty substitute ${}', { dir: '/' }),
     ).resolves.toEqual({
@@ -73,6 +97,9 @@ describe('substituteTransform', () => {
     await expect(
       substituteTransform('foo ${MISSING} ${SECRET}', { dir: '/' }),
     ).resolves.toEqual({ applied: true, value: undefined });
+    await expect(
+      substituteTransform('foo ${MISSING:-} ${SECRET}', { dir: '/' }),
+    ).resolves.toEqual({ applied: true, value: undefined });
     await expect(
       substituteTransform('foo ${SECRET} ${SECRET}', { dir: '/' }),
     ).resolves.toEqual({ applied: true, value: 'foo my-secret my-secret' });
diff --git a/packages/config-loader/src/sources/transform/substitution.ts b/packages/config-loader/src/sources/transform/substitution.ts
index f10e5dc8e7..bc13100dd8 100644
--- a/packages/config-loader/src/sources/transform/substitution.ts
+++ b/packages/config-loader/src/sources/transform/substitution.ts
@@ -21,7 +21,9 @@ import { SubstitutionFunc } from '../types';
 /**
  * A environment variable substitution transform that transforms e.g. 'token ${MY_TOKEN}'
  * to 'token abc' if MY_TOKEN is 'abc'. If any of the substituted variables are undefined,
- * the entire expression ends up undefined.
+ * the entire expression ends up undefined. Additionally, supports parameter substitution
+ * syntax to provide a default or fallback value for a given environment variable if it is
+ * unset; e.g. 'token ${MY_TOKEN:-xyz}' transforms to 'token xyz' if MY_TOKEN is unset.
  */
 export function createSubstitutionTransform(
   env: SubstitutionFunc,
@@ -37,7 +39,20 @@ export function createSubstitutionTransform(
       if (part.startsWith('$$')) {
         parts[i] = part.slice(1);
       } else {
-        parts[i] = await env(part.slice(2, -1).trim());
+        const indexOfFallbackSeparator = part.indexOf(':-');
+
+        if (indexOfFallbackSeparator > -1) {
+          const envVarValue = await env(
+            part.slice(2, indexOfFallbackSeparator).trim(),
+          );
+          const fallbackValue = part
+            .slice(indexOfFallbackSeparator + ':-'.length, -1)
+            .trim();
+
+          parts[i] = envVarValue || fallbackValue || undefined;
+        } else {
+          parts[i] = await env(part.slice(2, -1).trim());
+        }
       }
     }