The earliest Edward Shepherd Morrell I can see was b. 1872 Liverpool. His parents were Elias Morrell (from Derbyshire) and Elizabeth nee Smith (from Liverpool). They also gave a child the middle name Smith, so using family names as middle names for kids is something this family certainly did.
Looking at Edward Shepherd X's more generally, there are multiple Edward Shepherd Smiths in the Liverpool area (a few others with different surnames also - not that many). It would be worth looking into Elizabeth Smith's family to see if there was some connection there. Perhaps her brother, father, grandfather, favourite uncle, etc. was Edward Shepherd Smith and the first Edward Shepherd Morrell was named for him.
There is only one Edward Shepherd (Edward Shepherd Cockayne) in Derbyshire, who married there in 1879, so it's not a common combination of first name (compare, e.g. John Wesley as first names which there are masses of). In my family we have an example where a middle name, originally a surname, was passed down through several lines including on the maternal side like this.