You've probably noticed that Picasa Web's storage counter shows that you have more free space than a couple of days ago. It turns out that this is not a bug.
"We recently made a change whereby any pictures 800 pixels and under don't count towards used PWA storage. The new GB numbers you're seeing are the result of quota recalculations that were made," informs a Google employee.
The new feature encourages users to upload smaller images. If you use Picasa to upload your photos, there's a setting that lets you pick the dimensions of the photos that are uploaded. The "small" option is recommended "for publishing images on blogs and webpages". Blogger users who resize their photos before uploading them will no longer have to buy extra storage if they're prolific.
Another important change is that "all videos under 15 minutes also don't count towards used PWA storage". That means you can now upload short videos to Picasa Web Albums without worrying about the file size.
Update: "Photos less than 800 pixels x 800 pixels and video less than 15 minutes long that are uploaded to Picasa Web Album, Blogger, or Buzz don't count towards your storage quota." (Picasa Web's help center)