Victorians left without power after devastating storms will be eligible for a weekly hardship payment of up to $1680.

Acting Premier James Merlino announced the grants on Thursday, a week after storms brought down trees, caused major flooding and destroyed powerlines across the east of the state.

“I’ve lived in this region my whole life. I’ve never seen the extent of the damage here in the Dandenong Ranges,” he said in Olinda, east of Melbourne.

He said 7000 households remained without power, with the worst-affected in the Dandenong Ranges expected to be off the grid until July 10.

“The depth of winter and weeks and weeks without power. This is an unprecedented emergency,” Mr Merlino said.

He said current disaster recovery funding arrangements with the Commonwealth did not cover the situation.

The state government, in partnership with the federal government, will offer a Prolonged Power Outage Payment for all eligible households without power from Thursday.

The payment will be administered by Ausnet and will help families buy the basics and find alternative accommodation for the next three weeks.

Mr Merlino said the money was expected to be jointly funded by the state and federal government.

He confirmed Bushfire Recovery Victoria would take the lead in co-ordinating the clean-up and the recovery. Members of the Australian Defence Force will arrive in the Dandenong Ranges and Traralgon, in the Gippsland region, on Thursday to assess the damage.

Also on Thursday, the Victorian government declared a state energy emergency because of damage to the Yallourn power station and coal mine, in the Latrobe Valley, from the recent flooding.

Energy Minister Lily D’Ambrosio said significant cracks in the mine had put it at risk of flooding, and “the impact of that would be significant”.

“We need to take swift action, and the best way to take swift action is declaring this energy emergency,” Ms D’Ambrosio said.

The Yallourn power station supplies more than a fifth of the state’s energy.

The government said the Australian Energy Market Operator had given it assurances there was still sufficient supply of power to meet the state’s needs.

The declaration will allow Energy Australia to undertake emergency works, without going through normal planning and regulatory approvals, and divert river water away from the mine, relieving water pressure on the mine walls.

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Thursday’s developments came as AusNet, the energy provider for Victoria’s east and north-east, confirmed that initial repair estimates had been wrong for the Dandenong Ranges.

With about 9000 properties and businesses across the state’s east still without power, the energy company said the worst-affected Dandenongs areas should prepare to be off the grid until July 10.

“We are deeply sorry. We now understand the extent of the damage and scale of the recovery and repair ahead,” AusNet said.

“This will affect 3000 customers in Ferny Creek, Kalorama, Mount Dandenong, Olinda, Sassafras, Sherbrooke, The Basin, Tremont and Upwey.

“As we progress through repairs, the power will gradually come back on across the region.”

Meanwhile, nearby residents of three storm-hit Yarra Ranges suburbs have been told not to drink tap water until further notice.

The Department of Health issued an urgent warning on Wednesday morning to people who live, work or are in Kallista, Sherbrooke or The Patch not to drink tap water, even if it is boiled, due to contamination.

It is expected the warning will remain effective for two more days.

Two people died in the dangerous storms last week, with minor flood warnings still current for the Latrobe, Thomson and Yarra rivers.

-with AAP