The technology isn’t there yet, both in terms of running on the average gamer PC and in terms of producing a result that is predictable enough to actually fit into a given game world. In the context of games you don’t want the AI to just make up any old crap based on something completely unrelated to the game world.
With the right context given to the AI (backstory, motivation, personality, specific plot points the character has to mention at certain points in the game) as is it can provide pretty decent responses. The hardware limitation exists for sure, but we already have online-only single player games, at least this would provide a functionality instead of just more drm.
chat gpt can’t even tell a cohesive story where it remembers what it said 3 paragraphs ago