Here is a short guide on using a substitute for powdered sugar. Granulated Sugar. Granulated sugar can be used as a substitute for powdered sugar, but not as is. To substitute powdered sugar with granulated sugar, you must understand the difference between the two. Powdered sugar is granulated sugar that has been ground up into a finer powder. To prevent it from clumping up, cornstarch has been added as an anti-caking agent.