Abstract The concept of reliability has been known and used for many years. Quantitative reliability evaluation using probabilistic techniques is widely accepted for evaluating the adequacy of installed generating capacity in planning power systems. Adequacy has been defined as the ability of the system to supply load while taking into account component outages. Recently, however, power system planners have expressed their interest in defining the adequacy in a broader sense, considering the ability to supply load ‘economically’ under component outages. This has led to growing interest in using the adequacy assessment methods to determine new indices such as the expected penalty due to deviating from the economic dispatch (EPDED). This paper introduces a generation system adequacy method for multistate units reflecting the penalty associated with off-economic dispatch states. A unit addition algorithm has been developed for generation system reliability evaluation considering n-state units. The algorithm computes reliability indices such as probability, frequency, and mean duration. Also, assuming a fixed load, the minimum generation cost required to satisfy the load under normal and outage conditions can be computed. The incremental cost associated with the normal condition represents the ‘economic dispatch’ state, whereas the incremental cost associated with outage conditions may represent the ‘off-economic dispatch’ states. By calculating the system incremental cost under each outage, a new index called ‘penalty due to deviation from the economic dispatch’ is also calculated for various levels of capacity outage in addition to the aforementioned indices. The application of this method is illustrated using an example.