Wanting to see what all the fuzz was about regarding AI generated NPC dialogue I set up an AI bot on Discord based on the in game character Isabell as a proof of concept.
The AI has a fair amount of context and personality and wont hesitate to tell lewd stories if asked.

Not sure if this would scale for a game at all but the technology is already at a really decent stage and will only get better with time (the model I'm using is only a few weeks old).

No promises that the game will have AI generated NPC dialogue but I will continue to explore the subject.
In the meantime, feel free to test the bot over on discord.