The Grade II listed 1860s station building is currently blocked by the arcade, which has been earmarked for demolition since 2016.
Southwark Council has said that the project will transform the station entrance from a “series of narrow and dark passageways” into a “light, vibrant and spacious civic square”.
The arcade is set for demolition this summer, with the final remaining businesses in the building set to leave in the coming months.
The new square will be completed next year, making the newly-renovated façade of the station building visible from Rye Lane.
The local authority says it aims to reinstate the original station forecourt with planting, seating and lighting, while also exposing the railway arches on either side of the square.
Network Rail also plans to upgrade the existing station, including building a new station concourse with lifts and stair access to all platforms.
Accessible toilets, wider platforms, additional gate lines and an entrance from Dovedale Court are also planned.
Southwark Council has awarded the contract to carry out work to create the station square to BAM Nuttal Ltd.
Cllr Helen Dennis, cabinet member for new homes and sustainable development, said: “This is a massively exciting time for the residents of Peckham, and having let their passion be known for the regeneration of the station square, I’m glad we’re taking a step closer to delivering for them.
“With the help of BAM Nuttal Ltd, the GLA and Network Rail, Peckham Rye Station Square will be a welcoming, vibrant and picturesque space which I’m sure the local community will take to heart.”
The first phase of the project was the refurbishment and extension of the Blenheim Grove corner building, which the local authority has said is now complete and ready for new businesses to move into.
