Both issues (that the Widget Explorer covers auto-hide panels and the left edge of the desktop, making it impossible to place widgets there directly) are valid.
Making the widget explorer a normal window is not necessarily the best design solution for this problem, though.
Therefore I have changed the title and will confirm the problem(s), but not the proposed solution.

Idea:
Switch sides button?

(In reply to David Edmundson from comment #2)
> Idea:
> Switch sides button?

Would work, but not be very elegant.
A better solution would be to hide the widget explorer as soon as a Widget es dragged out of it so as to not cover any area where it could be dropped, and only show it again when it's released. It's not needed while placing a Plasmoid anyway.

It will not work when user wants to move already placed widget to make space for widget he wants to add. Sidebar could jump to other side when there is some user activitu under the sidebar, but it also feels a bit ugly.

When adding widgets to panels, I would like to have "sidebar" in middle of the screen, so all edges are free. But when adding widgets to desktop, real sidebar is probably better.

You can close the Widget Explorer while moving around other widgets, can't you?
I was also thinking about some way to detect when the user wants to manipulate existing widgets under the widget explorer and hiding it temporarily then. Just have to find a good solution.

The downside of using a normal window is that then users would have to move the window around whenever they want to put a Widget where the window currently is, so a smart solution would be more elegant.

But when I close the sidebar, I loose position in the list of widgets, so I have to find again what I already found.

Moving the window is a very simple and obvious operation. Smart solutions tend to be too complicated to be predictable. So I gues the best would be combining both. Sidebar with some simple mechanism to get out of the way, like jump to otherside when moving widget under the sidebar. And then button to detach sidebar, so it becomes normal window and can be moved around freely in case the smart is not smart enough. So there would be two buttons in top right corner of the sidebar, the same two buttons as on QDockWidget.

How about a sticky sidebar that is closed only intentionally? See as well the latest proposal about standardization of sidebars. The arrangement of plasmoids can be done afterwards.

Git commit 46f466bf12c6e6e2d8d50f53cfedcf48dd8a7eb9 by Kai Uwe Broulik.
Committed on 15/03/2016 at 20:27.
Pushed by broulik into branch 'Plasma/5.6'.

[Widget Explorer] Become transparent during widget drag

This makes the Widget Explorer fade and become transparent for mouse events while
dragging a widget. This allows to place widgets directly behind the Widget Explorer.

Drive-by fix to use a declarative approach for preventWindowHide.
FIXED-IN: 5.6.0

Differential Revision: https://phabricator.kde.org/D897

M  +2    -2    desktoppackage/contents/explorer/AppletDelegate.qml
M  +8    -17   desktoppackage/contents/explorer/WidgetExplorer.qml
M  +2    -0    desktoppackage/contents/views/Desktop.qml

http://commits.kde.org/plasma-desktop/46f466bf12c6e6e2d8d50f53cfedcf48dd8a7eb9