<p>How effective is merging when folders and projects have been renamed in your solution?</p>

In my experience TFS can track renames, as long as you do all the renaming within the SourceControlExplorer (TFS).
The problems tend to occur when you have other people making changes to the original files while someone else is doing massive renames/moves, while someone else is editing the renamed version.
Where possible I would say that if you are doing large scale renaming and moving it is worth informing team mates, and if possible get them to hold off making changes until you've checked yours in.
As with all branch/merge issues the problem is greatly reduced by checking in and merging little and often.