The LilyPond module doesn't work any more with recent versions of ConTeXt. You can simply replace it with the
Filter module like this:
\def\readPDFfile#1{\externalfigure[#1]}
\usemodule[filter]
\defineexternalfilter[lilypond]
[continue=yes,
readcommand=\readPDFfile,
directory=lilytemp/,
output={\externalfilterbasefile.pdf},
filtercommand={lilypond -dbackend=eps -dno-gs-load-fonts -dinclude-eps-fonts -ddelete-intermediate-files -o"lilytemp/\externalfilterbasefile" "\externalfilterinputfile"}]
You can't use
\setuplilypond any more, but there is a better replacement: Collect your LilyPond settings in a .ly file, put it in your lilytemp directory and include it from within your lilypond block like this:
\startlilypond
\include "mysettings.ly"
...
\stoplilypond