The work comes as part of the South Wales Metro scheme.
The project will see the railway line from Queen Street to Cardiff Bay replaced and electric pylons installed. A second platform will also be put in place at Cardiff Bay station.
Transport for Wales is also currently electrifying and upgrading the Core Valley Lines.
New, more frequent tram-trains will run on the Treherbert, Aberdare and Merthyr Tydfil lines, along with new vehicles on the Coryton and Rhymney routes.
The project has faced delays and spiralling costs, with the pandemic, inflation and supply constraints blamed.
Transport for Wales is reluctant to commit to firm dates for the completion of this phase of the Metro, but is aiming for 2024.
James Price, Transport for Wales CEO, said: “The Bay Line transformation project is an important part of the South Wales Metro and we’re delighted to be able to begin construction work on the brand-new station in Butetown, as well as important upgrades to Cardiff Bay station."“From 2024 we’ll be providing a smoother, greener, modern public transport service which will open up a range of opportunities for people living in Butetown and the wider Cardiff Bay area."
A separate consultation is underway for a light rail link from Cardiff Central to a proposed new station at Newport Road, via Cardiff Bay.
The new line, which is not yet funded, is seen as the first phase of the 'Cardiff Crossrail' project - an idea to link up communities in the capital which aren't currently served by rail.
The work in Butetown marks the first brand new station in the South Wales Metro development.
Others - at locations such as Crwys Road, Roath Park and Gabalfa - are at various stages of planning.
Across the wider region, there are outline plans for new stations to serve major developments at Victoria Park/Ely Mill and along the M4 corridor.
But unlike the Core Valley Lines, these routes are still managed by Network Rail, and by extension, the Department for Transport in Westminster.
The Welsh Government has ambitious targets for reducing car use and encouraging greater adoption of public transport.
Developing additional stations - and brand new routes altogether - could be a vital step in achieving that.
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