My grandfather became very agitated and began hallucinating in the icu - what causes that?

Delerium: Aggitation like you describe is very common with elderly patient in the icu. It is referred to as delerium which is an acute state of confusion and aggitation caused be a combination of illness, lack of sleep, sedatives, and an unfamiliar environment.

There are many!: Potential causes include infection and sepsis(an inflammatory responsed to infection), medications, abnormal blood pressure (either high or low), inflammatory diseases such as lupus or vasculitis and neurological processes such as intracranial hemorrhage. Finding the exact cause can be problematic because patients in the ICU often have many pre-existing medical conditions.

Many things: There is no simple answer to this question, the answer partially lies in why he was in the ICU in the first place. Infection can lead to the brain to be depleted of glucose or triglycerides, or may cause the brain to be unable to use sugars (through mitochondrial dysfunction) or the drugs he was given to keep him safe may have resulted in delerium... So, without a copy of his chart i can't say.

ICU Psycosis...: This is likely an entity called ICU psycosis and is thought to at least be partly due to not readily being able to separate day and night because the ICU tends to be just as noisy and the lights stay on no matter what time of day it is. There is not always a window near the patient in this setting so the brain becomes confused leading to psycosis. Tends to disappear once out of icu.

Common confusion: Both illness and medications used to keep patients calm and sedated can cause significant confusion especially as they get older. This is called an encephalopathy and almost always completely resolves as the illness improves and medications can be withdrawn.