You can call the playdate.debug functions in the console (there's a text entry field at the bottom of the console window, if you'd missed that) but like Inside Playdate says, this is all experimental, untested code that I wouldn't expect to work correctly. We aren't planning on adding debugger UI to the simulator, but I believe Logan's already done some work on that in Nova.
I'll file a bug to see if we can get those functions working again, though! Our intern added those.. five years ago, I think?
I too would like to know whether this is supposed to work. There's a comment in another thread about debugging which says it used to. I got to the same place you did, have some code, have the extension, clicked on the source and got a blue indicator arrow, ran the code, no debug.
Also at the start of this thread is a comment about setting playdate.debug.setEnabled(true) but there's nothing in the documentation about playdate.debug and adding this line fails so perhaps playdate.debug was also removed