How can I merge SMS and Hangouts messages within Hangouts? It made sense to me to merge SMS, WhatsApp style messaging and video calls into one app to save resources and switching between apps so I set up Hangouts to be the SMS app. 

I just had one problem - how to send SMS messages from Hangouts? (If I know the person has a problem with data reception, then I do specifically want to send an SMS at that time, for instance.)

According to Google:

"Choose a contact from your conversations list. Touch someone's name at the top. You can then choose SMS from the drop-down menu."

But that is not true in practice. It appears the reason I couldn't do that was because I was in the "hangout" for Hangout messages (I will call it MoIP - Message over IP - in the following) and video calls for that person, not the SMS "hangout" for that person.

Integrating the two in one app and then separating them seems to be going half a step backwards again, so does anybody know if I can merge those two hangouts and do SMS, MoIP and video calls to a person from the same "hangout"?

My phone is a Moto G 1st generation without 4G (XT1032) with Android 5.0 "Lollipop".
If you long press on either hangout (MOIP or SMS), then press on the other one you should get an option to merge them. This should then give you the option to send either from the same hangout.

There is also a setting within Settings > SMS to Enable merged conversations which needs to be enabled.