I don't think this is "proof" that Source engine 2 is in development, The fact that valve code uses these flags/keys to determine which engine to use doesn't mean both engines even exist. This line increases their code's overall engine portability, maybe in a future sense, kind of like "Let's make it so that when we have a new engine, we won't have to rewrite our code in order to use it".

In my opinion, all this shows is that a "source engine 2" is being planned for, but not necessarily that it is currently in development. And that makes sense, obviously Valve will keep making games, sooner or later they will need a new game engine, so it's not all that shocking.

And about Episode 3, I can't see why everyone thinks the existence or non-existence of a source engine 2 has anything to do with whether or not a new half life game is in the works...

Have to agree with this guy's comment tbh

But still, yay

As of the end of last year, Valve has said that there were no plans as of yet for a new Source Engine from the studio. They created Source to be modular and upgradable over time, which is what they've been doing for some years now. So either this is still Source but with some upgrades (likely) or it's an entirely new engine that is only a few months old (not quite as likely). It could also be that the two are unrelated and that Episode 3/Half-Life 3 will be build on Source, just a more updated version of the engine you already know. Source 2 could then be something the studio is working on for the next-generation of consoles that will not see the light of day in Episode 3/Half-Life 3 but rather further on down the line.

Keep in mind that it is widely known, said, and accepted that the builds of the Source Engine dating from around the time Left 4 Dead 2 was released is known as "Source Engine 2". This was the case, at least, internally at Valve and later made known publicly as a bit of an off hand remark. So before the world gets set on fire by all of this speculation, it would be quite wise not to get your hopes up too much.

This however is more plausible;