As Australians digested the news this week that benchmark electricity prices are set to rise by as much as 18 per cent, Bruce Mountain had a worrying thought. 

While the headline numbers looked bad, he reckoned the reality was likely to be far worse.

"It's quite possibly disastrous for customers," Mr Mountain said.

This week marked a turning point for electricity users as the upheaval and spiralling costs of the wholesale energy market finally started to hit home.

The Australian Energy Regulator, unable to ignore the turmoil, lifted the so-called default market offers that act as a sort of price cap for customers by double-digit rates.

It was a decision that will directly affect only about 10 per cent of the market in Queensland, New South Wales and South Australia.

A similar share will be affected in Victoria, where the Essential Services Commission this week also raised prices.

But Mr Mountain, the head of the Victoria Energy Policy Centre, said the changes were merely the tip of an iceberg that would hit millions more customers much harder.

Small retailers 'to go bust'

Most ominously, Mr Mountain said wholesale power costs that had risen 141 per cent in the 12 months to the end of March were threatening to send many smaller electricity retailers to the wall.

And if — or more probably when — that happened, he said competition would largely evaporate from the market and electricity bills could leap as much as 50 per cent.

"Very few customers are on those [default] offers," Mr Mountain said.

"Most customers are on much cheaper offers which they've got in the past because wholesale prices have been much lower.

"So those cheap offers are gone and most customers are going to be seeing much bigger increases than what has been notified by the regulators."

The warning has been backed by consumer groups pointing out that some smaller power retailers have effectively encouraged their customers to leave because of rocketing costs.

Joel Gibson from consumer advocacy One Big Switch this week noted a number of providers had been forced to jack up rates by extraordinary levels to cope with the surging wholesale market.

Eye-watering price rises

Mr Gibson said tariff increases ranged from 43 per cent to an eye-watering 285 per cent — increases which he claimed many consumers could not afford.

"These are the biggest price hikes we've ever seen in Australia," Mr Gibson said.

"This is also the third retailer we've seen encouraging customers to leave, which we've never seen before.

Underlying the disruption is extreme volatility in energy markets, where prices for coal and gas have been propelled to record highs by forces including the war in Ukraine.

Coal still accounts for about two-thirds of the electricity used by Australians, and the commodity's rise in price was last month cited as a major cause of ballooning wholesale costs.

Mr Mountain explained that smaller retailers were particularly vulnerable to rising wholesale costs because few had the ability to generate much, or any, of their own electricity.

He said small operators were effectively resellers unlike bigger providers such as Origin or AGL which had their own massive generation fleets and long-term control over prices.

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Consumers facing rough ride

Although the lack of integration could be an advantage when wholesale prices were low, Mr Mountain said it was a potentially fatal weakness when the market surged.

"This is a windfall gain for the big producers by and large; they're insulated on their costs of production but they benefit from the much higher wholesale price which feeds into retail prices.

"And they are so vital to the market — they force competition, they bring innovation the big firms need to follow — so, losing those small players is going to be an enormous loss for the market in the long term."

One upside from the volatility, he said, was the signal it sent to renewable energy investors who would be rushing to provide new supply.

However, he said it would likely be years before new projects and changes to the grid could put any downward pressure on prices and consumers were in for a rough ride in the meantime.