Musk has positioned the merger as an essential step in his masterplan, which involves the development of an integrated solar panel and battery product based on the Powerwall.
"Now is the right time to bring our two companies together," read a statement from Tesla on the company blog. "Tesla is getting ready to scale our Powerwall and Powerpack stationary storage products, and SolarCity is getting ready to offer next-generation differentiated solar solutions."
"By joining forces, we can operate more efficiently and fully integrate our products, while providing customers with an aesthetically beautiful and simple one-stop solar and storage experience."
Automotive company Tesla specialises in electric cars and batteries. The company imagines offering "one installation, one service contract, one phone app" to its customers.
As well as being founder and CEO of Tesla, Musk is the chair and principal shareholder of SolarCity. He has been involved with the company – run by his cousin Lyndon Rive – since its founding in 2006.
Tesla first made the move to acquire SolarCity in June, and the all-stock offer has since been under deliberation.
Shares in both companies fell immediately after the announcement, with the Financial Times reporting that Standard & Poor's had warned it might cut Tesla's credit rating due to "significant risks related to the sustainability of the company's capital structure".
Musk reiterated the strategic importance of the merger in his recent masterplan for Tesla, which outlined his intentions to evolve the electric car brand into a broader solar energy company.
He also announced the company will "expand to cover the major forms of terrestrial transport" and unveil autonomous buses and trucks next year.
The automotive company first rose to prominence when it released 2008's Tesla Roadster – the first mass-produced electric car to go on sale in the US in the modern era. In recent years it has also developed self-driving technology and the Tesla Powerwall, a battery to store renewable energy for use in homes and businesses.