For anyone who may comes across this in the future, the sku was my issue.
This article: https://docs.microsoft.com/en-us/azure/virtual-machines/windows/generation-2#azure-cli
mentions a command
Get-AzVMImageSku -Location westus2 -PublisherName MicrosoftWindowsServer -Offer WindowsServer
Which lists the gen2 sku types.
Basically
sku = “16.04-LTS”
Just needs to be
sku = “16_04-lts-gen2”
And then any gen2 instance type will work.