We put a recessed light in a wooden bulkhead over the sink when we did our recent remodel. At the contractors suggestion we went with a smaller fixture (4" instead of 5", I think). Gives plenty of light but is smaller and not quite as noticeable. I think it has a halogen bulb in it.

Not sure what look you're going for, but here's my first thought -- clad it with reclaimed wood if massive beams would make any sense there...? (Cursor over for full image.)

The smallers lights sound nice. I would remove the bulk head and then hang pendant lighting over the window and table nook area.

I think I'd put pendant lighting over the peninsula counter and a strip light under the cupboard. What about two small pendants over the sink.
Is that bulkhead a beam, can it be removed, or can you clad it to take in shallow recessed lights? if so you could then put in recessed lights above the sink and the counter as Barnhart gallery has suggested.