Induction At The Opening of A Contact
According to Lenz's law, if the current through an inductance changes, this inductance induces a voltage so the current will go on flowing as long as there is energy in the magnetic field. If the current can only flow through the air, the voltage is therefore so high that the air conducts. That is why in mechanically-switched circuits, the near-instantaneous dissipation which occurs without a flyback diode is often observed as an arc across the opening mechanical contacts. Energy is dissipated in this arc primarily as intense heat which causes undesirable premature erosion of the contacts. Another way to dissipate energy is through electromagnetic radiation.
Similarly, for non-mechanical solid state switching (i.e., a transistor), large voltage drops across an unactivated solid state switch can destroy the component in question (either instantaneously or through accelerated wear and tear).
Some energy is also lost from the system as a whole and from the arc as a broad spectrum of electromagnetic radiation, in the form of radio waves and light. These radio waves can cause undesirable clicks and pops on nearby radio receivers.
To minimise the antenna-like radiation of this electromagnetic energy from wires connected to the inductor, the flyback diode should be connected as physically close to the inductor as practicable. This approach also minimises those parts of the circuit that are subject to an unwanted high-voltage — a good engineering practice.
Read more about this topic: Flyback Diode
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