Is having a prison yard completely necessary?

Solution 1:

You don't need a yard once you have the grants that require one, but it's useful. You'll also need to find other ways to fulfil the exercise and recreational needs.

The exercise bench (as well as the phone box and recreational items) can be used in common rooms or cells/dormitories. Not all prisoners have the exercise need but those that do will need access to a bench to satisfy it.

What the yard does do is allow you to send your prisoners to a common recreational area. Unlike free time, this doesn't have a negative effect on their Punishment score and lets you control where they go.

If you'd rather just make recreation available and give your prisoners free time, do that instead. There is no penalty for never going outside.