This is awesome. LLM-powered NPCs is one thing I'm most excited about in the future of gaming. Characters repeating the same scripted dialog over and over again is one of the biggest immersion breakers.
IMO this isn't going to be fun for most once the novelty wears off. Games are goal oriented at the end of the day and the great games are masterfully curated multi-disciplinary experiences. I'd argue throwing a game wrapper around an LLM is a new LLM experience, not a new game experience.
Once someone decides that will be a critical and fundamental part of a AAA game, the rest can be worked out despite what will be I am sure many unintended emergent behaviors.