The company has made an all-stock deal worth as much as $2.8bn (£1.9bn).
Tesla shares fell 10% in extended trading after the announcement while SolarCity jumped 23%.
California-based Tesla is known as a pioneer in electric cars but since last year has also been selling batteries that can power homes and businesses.
Tesla chief executive Elon Musk described the deal as a "no brainer".
He said it would transform Tesla into the "world's only vertically integrated energy company offering end-to-end clean energy products", from solar panels and home storage batteries to electric vehicles.
Elon Musk is under serious pressure to make Tesla profitable. The path to that goal is two-fold. The cars may eventually bring in serious money, but the outlay needed to fund the manufacture of the vehicles is far greater than what sales are bringing in.
But while Tesla is considered to be a carmaker first and foremost, the real money might be in selling energy technology. Its enormous Gigafactory, opening this summer, will be able to make batteries for much more than cars.
The SolarCity purchase was always on the cards. Musk is already the firm's chairman and biggest shareholder, and the company's chief executive, Lyndon Rive, is Musk's cousin.
Some are questioning why Tesla had to buy SolarCity rather than just work closely with it. SolarCity has struggled lately, and so some are calling this a Tesla-financed bailout.
US electric carmaker Tesla has offered to buy solar panel company SolarCity in a bid to expand its clean energy business.