Insulin-producing β cells become dedifferentiated during diabetes progression. An impaired ability to select substrates for oxidative phosphorylation, or metabolic inflexibility, initiates progression from β-cell dysfunction to β-cell dedifferentiation. The identification of pathways involved in dedifferentiation may provide clues to its reversal. Here we isolate and functionally characterize failing β cells from various experimental models of diabetes and report a striking enrichment in the expression of aldehyde dehydrogenase 1 isoform A3 (ALDH⁺) as β cells become dedifferentiated. Flow-sorted ALDH⁺ islet cells demonstrate impaired glucose-induced insulin secretion, are depleted of Foxo1 and MafA, and include a Neurogenin3-positive subset. RNA sequencing analysis demonstrates that ALDH⁺ cells are characterized by: (i) impaired oxidative phosphorylation and mitochondrial complex I, IV and V; (ii) activated RICTOR; and (iii) progenitor cell markers. We propose that impaired mitochondrial function marks the progression from metabolic inflexibility to dedifferentiation in the natural history of β-cell failure.