OBJECTIVE Insulin resistance is associatedwithmitochondrial dysfunction and decreased ATP synthesis. Treatment of individuals with type 2 diabetes mellitus (T2DM) with sodium-glucose transporter 2 inhibitors (SGLT2i) improves insulin sensitivity. However, recent reports have demonstrated development of ketoacidosis in subjects with T2DM treated with SGLT2i. The current study examined the effect of improved insulin sensitivity with dapagliflozin on 1) mitochondrial ATP synthesis and 2) substrate oxidation rates and ketone production. RESEARCH DESIGN AND METHODS The study randomized 18 individuals with T2DMto dapagliflozin (n = 9) or placebo (n = 9). Before and after 2 weeks, subjects received an insulin clamp with tritiated glucose, indirect calorimetry, and muscle biopsies. RESULTS Dapagliflozin reduced fasting plasma glucose (167 ± 13 to 128 ± 6 mg/dL) and increased insulin-stimulated glucose disposal by 36% (P < 0.01). Glucose oxidation decreased (1.06 to 0.80 mg/kg · min, P < 0.05), whereas nonoxidative glucose disposal (glycogen synthesis) increased (2.74 to 4.74 mg/kg · min, P = 0.03). Dapagliflozin decreased basal glucose oxidation and increased lipid oxidation and plasma ketone concentration (0.05 to 0.19 mmol/L, P < 0.01) in association with an increase in fasting plasma glucagon (77 ± 8 to 94 ± 13, P < 0.01). Dapagliflozin reduced the ATP synthesis rate, which correlated with an increase in plasma ketone concentration. CONCLUSIONS Dapagliflozin improved insulin sensitivity and caused a shift from glucose to lipid oxidation, which, together with an increase in glucagon-to-insulin ratio, provide the metabolic basis for increased ketone production.