Your first thought is the right one. It's taking part in a theatre performance at school. The school play is a common activity in British schools.
Quite often for younger children it is a nativity or christmas theme but for older children it can be anything. My sons' school puts on a wide variety of plays from musicals such as 'Grease' to Shakespeare.
All the actors are schoolchildren and the children do the lighting, costumes etc with some help from the drama teachers.